Market power and trading strategies on the electricity market: a market design view

In this paper, we examine auction-based electricity markets from the viewpoint of a power company in order to evaluate the market design. Optimal trading strategies under uncertainty are developed by abolishing the widespread assumption that a single company has no influence on the market price. The resulting trading strategies explain the high prices and the high volatility observed in real electricity auction markets and show to what extent power companies can manipulate the market price. From these trading strategies, we derive critical points in market design and formulate necessary and sufficient conditions that characterize a competitive electricity auction market. Unfortunately, these conditions are far from being realizable in practice, from which follows that electricity auction markets cannot be competitive.