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Modeling Cournot Competition in an Electricity Market with Transmission Constraints

This paper studies Cournot competition with two generators who share one transmission line with a limited capacityto supply price-taking consumers. In such a game the network operator needs a rule to allocate transmission capacity. Three rules are studied: all-or-nothing, proportional, and efficient rationing. The first result is that if the network operator taxes the whole congestion rent, the generators strategically change their production quantities, such that the network operator obtains no congestion rent. This gives poor incentives for investment in transmission capacity. The second result is that the network operator can create competition among the generators, which can increase welfare. Marginal nodal congestion pricing, which is optimal under perfect competition, is sub-optimal when generators can set their production quantities freely. It does not generate revenue for the network operator, nor does it increase competition among the generators.

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Energy Specializations: Energy Modeling – Energy Data, Modeling, and Policy Analysis; Energy Modeling – Other; Electricity – Markets and Prices ; Electricity – Policy and Regulation

JEL Codes:
E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination
C59 - Econometric Modeling: Other
D42 - Market Structure, Pricing, and Design: Monopoly
E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General

Keywords: Cournot, electricity competition, electricity transmission, market models, congestion, welfare

DOI: 10.5547/ISSN0195-6574-EJ-Vol23-No3-5

Published in Volume23, Number 3 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.