Understanding How Generation Flexibility and Renewable Energy Affect Power Market Competition

Abstract

We study supply function competition among conventional power generators with different levels of flexibility. Inflexible generators commit production before uncertainties are realized, while flexible generators can adjust their production after uncertainties are realized. Both types of generators compete in an electricity market by submitting supply functions to a system operator, who solves a two-stage stochastic program to determine the production level for each generator and the corresponding market prices in the first and second stages. Our goal is to gain an understanding of how generators’ (in)flexibility affects their equilibrium behavior and the market price. We also investigate the impact of intermittent renewable power generation on the equilibrium, focusing on the effects of renewable energy penetration level, dispatch priority, and production-based subsidies. We find that the classic supply function equilibrium model overestimates the intensity of the market competition, and even more so as renewable energy introduces more intermittency into the system. The policy of economically curtailing intermittent generation intensifies the market competition, reduces price volatility, and improves the system’s overall efficiency. Moreover, we show that these benefits are most significant when the production-based subsidies are absent.

Keywords: Electricity market; supply function equilibrium; flexible/inflexible generators; intermittent (variable) generation; economic curtailment; production-based subsidies

JEL Classification: C72, D43, L94, L98, Q42, Q48