Congestion Management Games in Electricity Markets

This paper proposes a game-theoretic model to analyze the strategic behavior of inc-dec gaming in market-based congestion management (redispatch). We extend existing models by considering incomplete information about competitors’ costs and a finite set of providers. We find that inc-dec gaming is also a rational behavior in markets with high competition and with uncertainty about network constraints. Such behavior already occurs in our setup of two regions. Comparing market-based redispatch with three theoretical benchmarks highlights a lower efficiency level of market-based redispatch and inflated redispatch payments. Finally, we study seven variations of our basic model to assess whether different market fundamentals or market design changes mitigate inc-dec gaming. None of these variations eliminates inc-dec gaming entirely. JEL Classification: D43 Market Structure, Pricing, and Design: Oligopoly and Other Forms of Market Imperfection; D44 Auctions; L13 Oligopoly and Other Imperfect Markets; Q41 Energy: Demand and Supply; Prices; Q48 Energy: Government Policy