Supply Function Equilibria with Pivotal Electricity Suppliers

47 Pages Posted: 19 Oct 2004

See all articles by Talat Genc

Talat Genc

University of Guelph - Department of Economics

Stanley S. Reynolds

University of Arizona - Department of Economics

Date Written: July 2004

Abstract

The concept of a supply function equilibrium (SFE) has been widely used to study generators' bidding behavior and market power issues in wholesale electricity markets. Observers of electricity markets have noted the important role that pivotal suppliers, those who can substantially raise the market price by unilaterally withholding generation output, sometimes play. However the literature on SFE has not considered the potential impact of pivotal suppliers on equilibrium predictions. We formulate a model in which generation capacity constraints can cause some suppliers to be pivotal. In symmetric and asymmetric versions of the model we show that the presence of pivotal suppliers reduces the set of supply function equilibria. We show that the size of the equilibrium set depends on observable market characteristics such as the amount of industry excess capacity and the load ratio (ratio of minimum demand to maximum demand). As the amount of excess capacity falls and/or the load ratio rises, the set of supply function equilibria becomes smaller; the equilibria that are eliminated are the lowest-priced, most competitive equilibria.

Keywords: Supply function equilibrium, pivotal supplier, wholesale electricity market

JEL Classification: D43, L11, L94

Suggested Citation

Genc, Talat and Reynolds, Stanley S., Supply Function Equilibria with Pivotal Electricity Suppliers (July 2004). Eller College Working Paper No.1001-04. Available at SSRN: https://ssrn.com/abstract=604082 or http://dx.doi.org/10.2139/ssrn.604082

Talat Genc

University of Guelph - Department of Economics ( email )

50 Stone Road East
Guelph, Ontario N1G 2W1
Canada

Stanley S. Reynolds (Contact Author)

University of Arizona - Department of Economics ( email )

McClelland Hall
Tucson, AZ 85721-0108
United States

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