Author(s):Douglas, S.M. and Kotsan, S.

Reference:Submitted, Journal of Regulatory Economics, December 2003

Abstract: We analyze an electricity market that does not clear. The system operator satisfies fixed demand at a fixed price, and attempts to minimize ?cost? as indicated by independent generators? supply bids. No equilibrium exists in this situation, and the operator lacks information sufficient to minimize actual cost. As a remedy, we propose a simple efficient tariff mechanism. With the tariff, Nash equilibrium bids still diverge from marginal cost but nonetheless provide sufficient information to minimize actual cost, regardless of the tariff rate or number of generators.

Keywords: electricity market, electricity market, Nash equilibrium, marginal cost