| Summary/Abstract |
The use of uneconomic virtual transactions in day-ahead electricity markets with the intent to benefit related financial positions constitutes cross-product manipulation, and has emerged as a policy concern in recent years. Developing analytical frameworks and models to explain the means for achieving sustained day-ahead price manipulation is a challenge. This paper presents a two-stage equilibrium model of day-ahead price manipulation to enhance the value of financial transmission rights (FTRs). We cast the problem as a Stackelberg game between manipulating traders in the day-ahead market (leaders) and generating firms, grid operator and traders without FTRs in the day-ahead and real-time markets (followers). The model accounts for features specific to electricity systems, like intertemporal constraints of power generating units and real-time uncertainty, and considers imperfect competition as a condition allowing manipulation in equilibrium. We simulate hourly financial trading and operations decisions in a small test system for 24 hours. Results suggest that cross-product manipulation is sustained in equilibrium only when both physical and financial participants engage in Cournot competition. Further, as a result of loop flows, price separation between FTR source and sink may be induced by virtual transactions at network locations that are not on the FTR path.
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