Joint equilibrium analysis for options and spot gaming in electricity markets with transmission constraints

A joint Cournot equilibrium model for generators’ strategic option contracting and spot market competition is developed taking transmission constraints into account. This model can be reformulated as an equilibrium problem with equilibrium constraints (EPEC) and be solved by a nonlinear complementarity method. The influence of options on the equilibrium of electricity markets and generators’ bidding strategies is analyzed. The study shows that there is more incentive for generators to commit option contracts, and that the existence of option markets is particularly relevant to promoting the efficiency of electricity markets and mitigating the market power abuse of generators. Transmission congestion impairs generators’ enthusiasm for options trading, weakens the influence of options on electricity markets, and exacerbates the local market power abuse of generators. Generators can partly or fully appropriate revenues of consumers and transmission rights holders by strategic bids.