Market Power in Electricity Markets

Abstract

Electricity markets exhibit unique price dynamics not found elsewhere in other commodity markets. Characteristics such as limited storability, highly inelastic demand, and physical laws requiring continuous production to match consumption cause erratic price dynamics and short periods of extremely high prices known as spikes. We create a diffusion model under the assumption that a participating firm controls sufficient production capacity can significantly increase the spot price by bidding according to a strategy defined by a decision curve. We then extend Barlow's diffusion model to incorporate the decision curve and show results.