Market Power Potential Examination for Electricity Markets Using Perturbation Analysis in Linear Programming OPF Context

Market power potential is a major concern in design, planning, operations and control of electricity markets. This paper uses a perturbation analysis in the linear programming (LP) OPF context to examine market power potentials of generation companies (GenCos) gained by small-scale output withholdings. Based on the definition for market power, we use a two-step scheme. With small-scale withholdings simulated by bid perturbations, the GenCos´ profitability from bid perturbations is first examined, and then the effects on locational marginal prices (LMPs) of the identified profitable bid perturbations are investigated. With the LP OPF, LMPs and generators´ dispatched output might be differentiable or discontinuous as bidding parameters perturb. For the differentiable case, profit and LMP sensitivities are calculated to analyze profitability and market power potentials. For the discontinuous cases, we explicitly calculate the jumps in LMPs or dispatches, and examine the incentive of GenCos to cause these jumps as well as the effects of these jumps on market outcomes. The proposed perturbation analysis provides valuable insights for both the GenCos and the independent system operator (ISO). For the GenCos, the profitability analysis provides guidance in how to perturb their bids and with which other GenCos they should merge or collude to reap more profit. For the ISO, the market power potential results are insightful in examining the vulnerability of the market in face of generation bidding manipulations and predicting GenCos´ bidding behaviors.