Market power and welfare effects in two-stage electricity market with transmission constraints: A stochastic equilibrium approach

The purpose of the present study was to investigate the impact of market structure and physical network constraints on the performance of deregulated wholesale electricity market under demand uncertainty. The problem was formulated as a Mixed Complementarity Problem, and Stochastic Equilibrium Programming methodology was employed to explore producer's choice under uncertainty. In the present study, network constraints affected welfare creation in the market as well as its distribution between consumers and producers. Both thermal line constraints and thermal line losses decreased overall social welfare of market participants. Present study shows that demand uncertainty reduces social welfare and total volume of electricity consumed. Furthermore, market structure impacts total welfare created and its distribution between consumers and producers. Market structure with both day-ahead and spot markets produces more social welfare than spot-only market structure. Moreover, consumers are better-off in the two-stage market relative to spot-only market structure. Producers, on the other hand, benefit in markets without day-ahead trading. These results suggest that forward trading is a viable strategy to mitigate market power effects in deregulated electricity markets.