Gaming and price spikes in electric power markets

Many challenging issues arise under the newly deregulated competitive electric power markets. Instead of centralized decision-making in a vertically integrated environment as in the past, decision-making is now decentralized and driven by market forces. Gaming and price spikes have been observed in almost every electricity market but explicit analysis of these phenomena is rare. In this paper we study historical bidding behavior to see how power suppliers and demand service providers were actually bidding in the California day-ahead energy market. Based on our observations we formulate a Prisoner's dilemma matrix game and introduce the notion of "opportunistic tacit collusion" to explain strategic bidding behaviors in which suppliers withhold generation capacity from the market to drive up prices. This explanation is applicable with or without market power, transmission constraints, and insufficient supply, and is only enhanced by these factors. Our analysis is generally applicable to any unifo rm price electricity market in which there is significant insensitivity to price on the demand side.