Determining collusion opportunities in deregulated electricity markets

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Official URL: http://dx.doi.org/10.1016/j.epsr.2016.08.014

The primal goal of deregulated electricity markets is to attain perfect competition among generation companies. Yet, a deregulated market is still prone to threats that may disrupt the competition. While the independent system operator, responsible for administering the electricity markets, aims to provide the consumer with the lowest possible electricity price, lack of competition may increase prices. We use a game-theoretic model to represent the market clearing mechanism involving the independent system operator and the generation companies in order to characterize the sufficient conditions that make it possible for the generators to engage in collusive behavior. These conditions are embedded into a bi-level optimization problem where the objectives of the independent systems operator are conflicting with those of the generators. We develop an algorithm for the bi-level problem to show that the optimal behavior of generators are collusive when sufficient conditions exist. We present numerical examples to illustrate our findings.