Merger Analysis in Wholesale Power Markets Using the Equilibria-Band Methodology

Around the world, electricity market regulators and competition authorities are struggling to find ways to reliably assess the likely market impact of mergers of generators. Conventional indicators of market power fail to capture key aspects of the exercise of market power in wholesale electricity markets. On the other hand, full-scale computation of Nash equilibria has historically been time consuming, non-transparent, and typically results in multiple Nash equilibria. In this paper we propose two methodological advances: an efficient approach to computing extremal-Nash equilibria in a wholesale power market with market power and the application of this approach in the assessment of wholesale market mergers. The extremal-Nash equilibria are those equilibria which have the highest or the lowest social cost to the society. The resulting formulation is a Mixed Integer Linear Program which efficiently finds the full set of extremal-Nash equilibria. The continuum of these extremal-Nash equilibria over a range of demand conditions describes the upper and lower envelopes of the Equilibria Band. To illustrate the advantages of the proposed approach, two case studies are explored, involving the New South Wales region of the Australian National Electricity Market, on the one hand, and the IEEE 14-Bus Test System, on the other.