How Inefficient Can An Electricity Market Be?

Imperfectly competitive electricity markets are exposed to strategic bidding behaviors by big players and are thereby threatened by significant inefficiency. The related literature has studied relevant game-theoretic models based on equilibrium problems with equilibrium constraints. However, the papers of this literature consider, each time, a given system (e.g. particular generators and cost functions) and assess the equilibrium inefficiency of that particular system. In this paper, we are interested in assessing the inefficiency of market equilibria, not for a single (arbitrary) set of participants, but in the worst-case. Specifically, we formulate the problem of searching in the space of possible generators’ true cost functions to identify the worst-case combination that would lead to the most severe market inefficiency at equilibrium. Our main result asserts that the worst-case inefficiency of electricity markets violates previous theoretical bounds that were derived through simplified market models. In particular, our simulations indicate that the worst-case equilibrium cost can as high as 1.5 - 2 times the optimal system cost, depending on the number of market participants.