Assessing the impact of transmission rights on market power using the simulation model ares

Transmission constraints can isolate markets and enhance market power. The allocation of transmission capacity is therefore a big issue in Europe and there is a growing interest among the continental European countries about market coupling, which may allocate optimally the transmission capacities. However, the allocation scheme of these transmission capacities may have an impact on market power that should be studied beforehand. Energinet.dk and RTE developed a common simulation tool, ARES, that is intended to bring a first answer to these questions. ARES, which is based on ELTRA´s MARS model, is a supply function equilibrium model that simulates an integrated market of several zones with different prices interconnected by lines whose flows are restricted. In this paper, we show the formulation of the basic problem, then include transmission rights in the problem and eventually study the impact of these rights, under different allocation patterns, on the market power of participants, using a test network schematising the European network, and show the consistency with the theoretical models