Analysis of long-term contract effects on market equilibrium in the electricity market with transmission constraints

Electricity markets with only a few large suppliers often exhibit less competitive behaviour than desired. The presence of transmission constraints further restrict competition among suppliers and provide more opportunities for suppliers to exercise market power. While it is generally acknowledged that long-term contracts provide good measures for mitigating market power in the spot market, thus reducing undesired price spikes, it is not clear how effective these contracts are if the market is severely limited due to transmission constraints. An analytical approach through finding a Nash equilibrium is presented for studying the effects of long-term contracts on market equilibrium in a bid-based pool with transmission constraints. Surprisingly the analysis shows that the presence of long-term contracts may result in reduced expected social welfare.