A novel simulation-based method for assessment of collusion potential in wholesale electricity markets

Abstract

Abstract This paper proposes a simulation-based method for assessing the collusion potential among Generating Companies (GENCOs) who participate in a wholesale electricity market. For this purpose, a game-theoretic framework is developed to model the strategic bidding behaviors of GENCOs in both non-cooperative and collusive oligopoly electricity markets. In a collusive oligopoly market, GENCOs may negotiate amongst themselves to form coalitions. The coalition formation problem in an economy with externalities can be adequately modeled in coalitional form by using partition function games (PFGs). The optimal bidding strategies of coalitions can be calculated based on the partial cooperative equilibrium concept. When GENCOs submit their coordinated bids and the Independent System Operator (ISO) clears the market, each coalition has to allocate obtained profit among its members. In favor of a stable profit allocation, the core solution concept is employed. Also, Shapley value is employed to distribute the utility of the coalition in a fairway. To investigate the partial cooperative equilibrium concept, the proposed model is applied to the IEEE 9-bus test system. As an application of Shapley value and core solution concept, the profit of the grand coalition is distributed among its members. Numerical results show that in a wholesale electricity market GENCOs have strong incentives to make collusion.