The Effects of Transmission Capacities on Market Outcomes: An Agent-Based Approach

In this paper a new approach is used to address the issue of quantifying market outcomes depending on level of competition and reduction of transmission capacities. In a deregulated electricity market, the capacity of transmission lines determines the degree to which generators in different locations compete with the other. Beside the fact that different agents have specific generation mix (cost functions) the reasons could be found in exerting market power by large generation firms causing congestion on transmission grid and market separation. The paper embeds these considerations in an agent-based computational model combined with DC load flow analysis that evaluates market efficiency outcomes. The model is applied on a benchmark grid in northwest Europe. The conclusion is that even agents without perfect rationality can manipulate price and profit of their market power. This effect is amplified when transmission capacities are used in a too conservative way.