Supply function equilibrium in power markets: Mesh networks

We study decentralized power markets with strategic power generators. In decentralized markets, each generator submits its supply function (i.e., the amount of electricity it is willing to produce at various unit prices) to the independent system operator (ISO), who takes the submitted supply functions as the true marginal cost functions, and dispatches the generators to clear the market. If all generators reported their true marginal cost functions, the market outcome would be efficient (i.e., the total generation cost is minimized). However, when generators are strategic and aim to maximize their own profits, the reported supply functions are not necessarily the marginal cost functions, and the resulting market outcome may be inefficient. The efficiency loss depends on the topology of the underlying transmission network, because the topology sets constraints on the feasible power supply from generators. This paper provides an analytical upper bound of the efficiency loss due to strategic generators. Our upper bound sheds light on how the efficiency loss depends on the (mesh) transmission network topology (e.g., the degrees of buses, the admittances and flow limits of transmission lines).