Counterexamples to commonly held assumptions on unit commitment and market power assessment

In the context of the ongoing deregulation of the electricity industry, we revisit the commonly held assumption that, under the condition of perfect information, a decentralized unit commitment would lead to the same power quantities traded and the same optimal social welfare as a centralized unit commitment. Taking operating cost independent of the output quantity into account, we show in the first part that meeting decentralized performance objectives of the individual market participants can lead to a lower efficiency than minimizing total operating cost in a decentralized way. This result concerns short-term optimization, and does not consider long-term investment issues. In the second part, we use an abstract example to show that a generator owner’s optimum bid sequence for a centralized auction market can be above marginal cost even when there is no market power-related strategic bidding. We conclude that marginal production costs cannot be used as baseline for the assessment of market power in electricity markets as generators bid higher than MC because of intertemporal constraints and uncertainties about prices of consecutive hours.