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The liberalization of the electricity sector has introduced competition at the generation level and gives incentives to new generating firms to attempt to enter the electricity market. However, due to the complexities related to the electrical energy trade, the newcomers should proceed only after careful decisions about their future plans and strategic actions. The following research shows that the choice of the location for installing new generating units is a crucial consideration. This paper presents a method for determining the best location for installing a new generator. A novel electricity market model that employs linear supply function equilibrium theory and utilizes the nonlinear AC power network representation is used for calculating the market equilibrium. The research focuses on the effect of the location of the new unit on the profits of both the new firm and the existing companies. The impact on the social welfare, nodal prices and bidding strategies is also discussed. It is shown that, under certain circumstances, the new entry may seriously reduce the profit of an existing firm, leading to economic failure.