Emission allowances auction for an oligopolistic electricity market operating under cap-and-trade

The authors consider a yearly auction where electricity generating companies (Gencos) bid to receive yearly green house gas (GHG) emission allowances. Gencos sell electricity in an oligopolistic electricity market that clears on an hourly basis and operates under a cap-and-trade emissions regulation scheme. Gencos strategically self-allocate their yearly allowance into hourly allowances that they then use to take part in the hourly electricity market. If a Genco emits above or below its self-allocated allowance for that hour then, in the first case, the hourly deficit is made up by buying an allowance from an external market, whereas in the second the hourly allowance surplus is sold to the external market. Recognising that the levels of power and emissions produced by the Gencos as well as the associated prices throughout the year will be influenced by both the yearly and hourly allowances, the auction maximises an objective function that is equal not only to the total amount bid by the Gencos to obtain allowances but also includes the yearly social welfare. This study proposes an approach that considers all of the above-mentioned points in a coordinated fashion and can be viewed as a mathematical program (the allowance auction) subject to a Nash equilibrium problem (the distribution by each Genco of its yearly allowance into hourly allowances), which in turn is subject to the Cournot-Nash equilibrium conditions of the hourly oligopolistic electricity market.