Electricity market power: marginal cost and relative capacity effects

Deregulation of electricity markets throughout the world requires that markets be constructed so as to insure fair and efficient prices. We investigate the use of a bilateral auction between agents as the market clearing mechanism in which the agents learn to bid/ask effectively using a genetic algorithm. Market Power Indexes are calculated for various configurations of relative capacity and production costs for the sellers in such a market and indications of the exercising of market power are sought. We found no statistically significant market power effect due to relative marginal costs or capacities. However, this absence of market power effects appears to be a consequence of the small number of sellers and the manner in which the standard genetic algorithm used to model seller learning actually prevents the sellers from exploiting their comparative advantages.