Market Power and Efficiency Analysis in Bi-level Energy Transmission Market

We study a bi-level energy market and a transmission system that sends the energy supply generated in the upstream market to consumers in the downstream market. The players including manufacturers and wholesalers in this market can exercise the market power to affect the productive efficiency of the energy supply. To analyze the impact of market power, we formulate the mixed complementarity problems to identify the Nash equilibrium and use a directional distance function to estimate the efficiency by the directional vector toward the Nash equilibrium. We investigate two cases of market power in the energy market: wholesalers as leaders, or bilateral bargaining power between manufacturers and wholesalers. The numerical study of a power generation market is conducted and the results show that the Nash equilibriums in the two cases provide the insights to drive the productivity and support environmental policies. Particularly, a sensitivity analysis shows that price volatility in the upstream transmission market significantly influences the equilibrium solution.