Agent-based analysis of the sources of market power in deregulated electricity markets

Bower, John (2001) Agent-based analysis of the sources of market power in deregulated electricity markets. Doctoral thesis, University of London: London Business School.

Abstract

Since the late 1980s many electricity markets have been deregulated around the world. A decade of experience shows that while privatisation can successfully replace public ownership in the electricity supply industry (ESI), creating a deregulated electricity market does not guarantee consumers will benefit if industry participants can exercise market power to maintain, or even raise, prices. This thesis seeks to establish how, and to what degree, the exercise of market power by generating firms is impacted by industry structure (i. e. the size and number of generating firms), trading arrangements (i. e. wholesale market clearing and settlement rules), and technology (i. e. the type and distribution of plant). A novel agent-based simulation (ABS) approach is used to model the strategic behaviour of generators in two deregulated European electricity markets. The England & Wales Electricity Pool ('the Pool'), where prices have been high and volatile since its inception in 1990, and the German wholesale bilateral market ('Germany'), created at the beginning of 1999, where prices have been consistently close to short-run marginal production costs. As both markets have similar patterns of demand, generation technologies, and an ESI largely in private ownership, the diametrically different market price outcomes present a paradox. However, traditional tools of economic analysis have, been relatively unsuccessful in analysing and explaining the cause of market power in electricity markets. The ABS methodology allows a `bottom-up' approach to be taken, that models the industry at the individual plant level with generating firms represented as autonomous adaptive agents each equipped with a rudimentary reinforcement learning capability. The agents compete with each other through a daily auction market, by developing endogenously their own trading strategies and learn to coordinate on focal point plant utilisation rates and jointly maximise profits.