Cross-product manipulation with intertemporal constraints: An equilibrium model

Nongchao Guo, Chiara Lo Prete

Research output: Contribution to journalArticle

Abstract

The use of uneconomic virtual transactions in day-ahead electricity markets with the intent to benefit related financial positions constitutes cross-product manipulation, and has emerged as a policy concern in recent years. Developing analytical frameworks and models to explain the means for achieving sustained day-ahead price manipulation is a challenge. This paper presents a two-stage equilibrium model of day-ahead price manipulation to enhance the value of financial transmission rights (FTRs). We cast the problem as a Stackelberg game between manipulating traders in the day-ahead market (leaders) and generating firms, grid operator and traders without FTRs in the day-ahead and real-time markets (followers). The model accounts for features specific to electricity systems, like intertemporal constraints of power generating units and real-time uncertainty, and considers imperfect competition as a condition allowing manipulation in equilibrium. We simulate hourly financial trading and operations decisions in a small test system for 24 hours. Results suggest that cross-product manipulation is sustained in equilibrium only when both physical and financial participants engage in Cournot competition. Further, as a result of loop flows, price separation between FTR source and sink may be induced by virtual transactions at network locations that are not on the FTR path.

Original languageEnglish (US)
Article number110851
JournalEnergy Policy
Volume134
DOIs
StatePublished - Nov 1 2019

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market
electricity
Flow separation
analytical framework
Electricity
rights
price
decision
firm
test
policy
Uncertainty
Power markets

All Science Journal Classification (ASJC) codes

  • Energy(all)
  • Management, Monitoring, Policy and Law

Cite this

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Cross-product manipulation with intertemporal constraints : An equilibrium model. / Guo, Nongchao; Lo Prete, Chiara.

In: Energy Policy, Vol. 134, 110851, 01.11.2019.

Research output: Contribution to journalArticle

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