Investigating the ability of demand shifting to mitigate electricity producers’ market power

Abstract

Previous work on the role of the demand side in imperfect electricity markets has demonstrated that its self-price elasticity reduces electricity producers' ability to exercise market power. However, the concept of self-price elasticity cannot accurately capture consumers' flexibility, as the latter mainly involves shifting of loads' operation in time. This paper provides for the first time theoretical and quantitative analysis of the beneficial impact of demand shifting (DS) in mitigating market power by the generation side. Quantitative analysis is supported by a multiperiod equilibrium programming model of the imperfect electricity market, accounting for the time-coupling operational constraints of DS as well as network constraints. The decision making process of each strategic producer is modeled through a bi-level optimization problem, which is solved after converting it to a Mathematical Program with Equilibrium Constraints (MPEC) and linearizing the latter through suitable techniques. The oligopolistic market equilibria resulting from the interaction of multiple independent producers are determined by employing an iterative diagonalization method. Case studies on a test market reflecting the general generation and demand characteristics of the GB system quantitatively demonstrate the benefits of DS in mitigating producers' market power, by employing relevant indexes from the literature.