Dependence of generation market power on the demand/supply ratio: analysis and modeling

In an electricity market with a power-pool structure, total generation capability and forecasted demand are the critical factors for generators attempting to strategically bid into the market or to exert their market power. Some power plants might be under their maintenance schedule and/or forced outage. Electricity demand generally increases during the high-temperature days. To diagnose, in advance, the existence of market conditions under which generators are able to exercise their market power, a forecasted demand and total available supply ratio is proposed as a possible index to indicate such conditions. This index is different from the Lerner and the HHI indices, which are standard in analysis of market power and market concentration. The forecasted information used here concerns demand and power plant status instead of generators´ market shares and elasticity of demand. The New England market data is then analyzed to test the proposed index. Subsequently, this ratio is applied to formulate a generator´s strategic bidding model which is aimed at explaining market dynamics.