How Transmission Affects Market Power in Reserve Services

Abstract

In electric power markets, transmission constraints facilitate the exercise of market power by limiting the ability of some competing suppliers to serve loads in particular locations. Such constraints can facilitate the exercise of market power in markets for both electrical energy services and electrical reserve services. This chapter is concerned with the interaction of transmission constraints with market power in electricity reserve markets. It finds that market power in reserve markets arises from the inability of new entrants to compete due to either: a) lack of sufficiently inexpensive opportunities to cite new generation; or b) lack of transmission facilities to transport reserve services to high-priced markets. The existence of reserve markets changes the ways in which electricity suppliers can exercise market power. If energy were the only electricity services, suppliers could exercise market power only if they withheld capacity. With both energy and reserve services, however, suppliers can also exercise market power by shifting capacity among services, generally away from reserve services and toward energy service.