Theory and Application of Linear Supply Function Equilibrium in Electricity Markets

Abstract

We consider a supply function equilibrium (SFE) model of interaction in an electricity market. We assume a linear demand function and consider a competitive fringe and several strategic players having capacity limits and affine marginal costs. The choice of SFE over Cournot equilibrium and other models and the choice of affine marginal costs is reviewed in the context of the existing literature.We assume that bid rules allow affine or piecewise affine non-decreasing supply functions by firms and extend results of Green and Rudkevitch concerning the linear SFE solution. An incentive compatibility result is proved. We also find that a piecewise affine SFE can be found easily for the case where there are non-negativity limits on generation.Upper capacity limits, however, pose problems and we propose an ad hoc approach. 1 We apply the analysis to the England and Wales electricity market, considering the 1996 and 1999 divestitures. The piecewise affine SFE solutions generally provide better matches to the empirical data than previous analysis.

Supply function equilibria: Step functions and continuous representations

“…For the case of linear marginal costs, there is a unique linear SF equilibrium, (Klemperer and Meyer, 1989;Green, 1996;Baldick et al, 2004) although the general analytic solution can still be characterised as a closed form solution and 6 assume that they were. Instead, their paper models the electricity market as a multiple-unit auction.…”

A spatially and temporally resolved model of the electricity grid – Economic vs environmental dispatch

“…A handful of these studies focus on the price or supply curves that generating units submit and estimate the impacts on the market results. Cournot equilibrium and Supply Function Equilibrium methods are usually used in such approaches [12,13].…”

“…Electricity demand in the U.S. increased from 690 kW h per capita in 1930 to 12,158 electricity demand are estimated to increase 44% and 77% from 2006 to 2030, respectively [1], and fossil fuels are projected to remain the number one source of primary energy for years to come. In the United States, coal and natural gas are the major fuels for generating electricity.…”

Equilibrium strategies in random-demand procurement auctions with sunk costs

“…Our analysis shows that the price cap plays a significant role. EXAMPLE 2 (UNIFORM AUCTION, SUPPLY FUNCTION MODELS) A number of authors, among them Rudkevich (2003), Baldick et al (2001), Anderson & Philpott and Anderson & Xu (2005), have followed the concept of supply functions in their study of uniform auctions for electricity trading. A supply function (see Klemperer & Meyer, 1989) gives the energy amount offered by a generator depending on the sales price.…”