Electricity Markets Cleared by Merit Order—Part I: Finding the Market Outcomes Supported by Pure Strategy Nash Equilibria

In an electricity market cleared by a merit-order economic dispatch we first identify the necessary conditions for the market outcomes supported by pure strategy Nash equilibria (NE) to exist when generating companies (Gencos) game through their incremental cost offers or supply functions. A Genco may own any number of units, each offering to generate power through an incremental cost curve or supply function consisting of multiple blocks. Then, we develop a mixed-integer linear programming (MILP) scheme to find the NE without approximations or iterations. In Part II of this paper, we show how to use these NE to derive a dominant offer strategy in terms of gaming or not gaming that best meet the risk/benefit expectations of the participating Gencos. The MILP scheme is tested on several systems of up to 30 generating units, each with four incremental cost blocks. Finally, based on these results, we carry out a number of numerical analyses of how market power is influenced by the number and size of the competing Gencos.