A comparison of electricity market designs in networks
Andreas Ehrenmann and Karsten Neuhof f
August 2003
Abstract
In the real world two classes of market designs are implemented to trade electric-
ity in transmission constrained networks. Analytical results show that in two node
networks integrated market designs reduce the ability of electricity generators to
exercise market power relative to separated market designs. In multi node networks
countervailing ef f ects make an analytic analysis dif f i cult.
We present a formulation of both market designs as an equilibrium problem with
equilibrium constraints. We f i nd that in a realistic network, prices are lower with
the integrated market design.
1 Introduction
If electricity is traded in areas with signif i cant transmission constraints, then two basic
design options may be used. First, in the nodal pricing approach or integrated market
design, a centralized system operator collects location-specif i c energy bids and then clears
the market for the entire region according to a well def i ned protocol. Such a design, as
implemented for example in New England and PJM (Pennsylvania, New Jersey Mary-
land and neighbouring states), ensures that dif f erent locational markets are automatically
arbitraged and the network is used ef f i ciently.
1