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The Impact of Imperfect Permit Market on Congested Electricity Market Equilibrium

The impact and efficacy of a cap-and-trade regulation on electric power industry depend on interactions of demand elasticity, transmission network, market structure, and strategic behavior of generation firms. This paper develops an equilibrium model of an oligopoly electricity market in conjunction with a permit market to study such interactions. The concept of conjectural variations is proposed to account for imperfect competition in permit market. The model is then applied to a reduced WECC 225-bus system with a detailed representation of the California market. In particular, we examine the extent to which permit trading strategies affect the market outcome. We find that a firm with more efficient technologies can employ strategic withholding of permits, which allows for its increase in output share in the electricity market at the expense of other less efficient firms.