Inefficiency in forward markets with supply friction

The growth of renewable resources will introduce significant variability and uncertainty into the grid. It is likely that “peaker” plants will be a crucial dispatchable resource for compensating for the variations in renewable supply. Thus, it is important to understand the strategic incentives of peaker plants and their potential for exploiting market power due to having responsive supply. To this end, we study an oligopolistic two-settlement market comprising of two types of generation (baseloads and peakers) where there is perfect foresight. We characterize symmetric equilibria in this context via closed-form expressions. However, we also show that, when the system is capacity-constrained, there may not exist equilibria in which baseloads and peakers play symmetric strategies. This happens because of opportunities for both types of generation to exploit market power to increase prices.