Pricing in Electricity Markets

The technical characteristics of electricity generation and transmission have implications for the way in which economic principles are adapted to evaluate pricing and regulation issues in electricity markets. In particular, there is an externality associated with the way in which electricity flows in networks because of Kirchoff's laws. In this paper, a mathematical programming model is presented that simulates a competitive electricity market, based on the spatial-intertemporal equilibrium models pioneered by Takayama and Judge (1971). The model is used to simulate the operation of a hypothetical electricity market, illustrating some of the issues arising from the network externality.