Equilibria in Network Constrained Energy Markets

Abstract

We study an energy market composed of producers who compete to supply energy to different markets and want to maximize their profits. The energy market is modeled by a graph representing a constrained power network where nodes represent the markets and links are the physical lines with a finite capacity connecting them. Producers play a networked Cournot game on such a network together with a centralized authority, called market maker, that facilitates the trade between geographically separate markets via the constrained power network and aims to maximize a certain welfare function. We first prove a general result that links the optimal action of the market maker with the capacity constraint enforced on the power network. Under mild assumptions, we study the existence and uniqueness of Nash equilibria and exploit our general result to prove a connection between capacity bottlenecks in the power network and the emergence of price differences between different markets that are separated by saturated lines, a phenomenon that is often observed in real power networks.