An official website of the United States government
Increasing use of natural gas for electricity production places added strains on pipeline systems that are used for transporting fuel. Pipeline constraints require power system operators to account for natural gas-supply restrictions in their operational processes. This paper proposes separate optimization models for clearing day-ahead wholesale markets for scheduling power and natural gas systems. We then develop a market-based mechanism that allows for efficient co-ordination of the two systems. Importantly, the co-ordination mechanism only requires the exchange of fuel-price, -supply, and -demand information between the two markets. This can be contrasted with other co-ordination mechanisms that require operations of the two systems by a single entity. Thus, we provide a computationally tractable co-ordination mechanism that does not require the exchange of proprietary information between natural gas and electricity system operators. We demonstrate the effectiveness and scalability of the technique using a numerical example.
more »
« less
This content will become publicly available on May 7, 2026
Winners and Losers from Vertical Integration Between Natural-Gas and Electricity Markets
Electricity systems in many parts of the world are becoming more dependent upon natural gas as an electricity-generation fuel. As such, electricity and natural-gas markets are becoming more interconnected. Contemporaneously, some electricity and natural-gas markets are integrating vertically, through the merger of electricity and natural-gas suppliers. The market-efficiency impacts of such vertical integration are unclear. On one hand, vertical integration could exacerbate market power, whereas on another it could mitigate double marginalization. To study this question, this paper develops a Nash–Cournot model of the two interconnected markets. The model is converted into a linear complementarity problem, which allows deriving Nash equilibria readily. Some theoretical results are derived for the case of a merger involving symmetric firms. In addition, the model is applied to a stylized example with a range of parameter values. We find that integration is social-welfare enhancing—which implies that mitigating double marginalization outweighs the exercise of market power. In most cases, the effects of merger can give rise to a prisoner’s-dilemma-type outcome. Merger is beneficial to the merging firms. However, profits of non-merging firms and total supplier profits decrease following a merger. Overall, our results suggest that vertical integration in energy markets may be socially beneficial. JEL Classification:C61, C72, D43, L1, L94, L95, Q4
more »
« less
- PAR ID:
- 10613407
- Publisher / Repository:
- Sage Publications
- Date Published:
- Journal Name:
- The Energy Journal
- ISSN:
- 0195-6574
- Format(s):
- Medium: X
- Sponsoring Org:
- National Science Foundation
More Like this
-
-
Abstract Global product platforms can reduce production costs through economies of scale and learning but may decrease revenues by restricting the ability to customize for each market. We model the global platforming problem as a Nash equilibrium among oligopolistic competing firms, each maximizing its profit across markets with respect to its pricing, design, and platforming decisions. We develop and compare two methods to identify Nash equilibria: (1) a sequential iterative optimization (SIO) algorithm, in which each firm solves a mixed-integer nonlinear programming problem globally, with firms iterating until convergence; and (2) a mathematical program with equilibrium constraints (MPEC) that solves the Karush Kuhn Tucker conditions for all firms simultaneously. The algorithms’ performance and results are compared in a case study of plug-in hybrid electric vehicles where firms choose optimal battery capacity and whether to platform or differentiate battery capacity across the US and Chinese markets. We examine a variety of scenarios for (1) learning rate and (2) consumer willingness to pay (WTP) for range in each market. For the case of two firms, both approaches find the Nash equilibrium in all scenarios. On average, the SIO approach solves 200 times faster than the MPEC approach, and the MPEC approach is more sensitive to the starting point. Results show that the optimum for each firm is to platform when learning rates are high or the difference between consumer willingness to pay for range in each market is relatively small. Otherwise, the PHEVs are differentiated with low-range for China and high-range for the US.more » « less
-
If a trader could predict price changes in the stock market better than other traders, she would make a fortune. Similarly in the electricity market, a trader that could predict changes in the electricity load, and thus electricity prices, would be able to make large profits. Predicting price changes in the electricity market better than other market participants is hard, but in this paper, we show that attackers can manipulate the electricity prices in small but predictable ways, giving them a competitive advantage in the market. Our attack is possible when the adversary controls a botnet of high wattage devices such as air conditioning units, which are able to abruptly change the total demand of the power grid. Such attacks are called Manipulation of Demand via IoT (MaDIoT) attacks. In this paper, we present a new variant of MaDIoT and name it Manipulation of Market via IoT (MaMIoT). MaMIoT is the first energy market manipulation cyberattack that leverages high wattage IoT botnets to slightly change the total demand of the power grid with the aim of affecting the electricity prices in the favor of specific market players. Using real-world data obtained from two major energy markets, we show that MaMIoT can significantly increase the profit of particular market players or financially damage a group of players depending on the motivation of the attacker.more » « less
-
The sharing economy has upset the market for housing and transportation services. Homeowners can rent out their property when they are away on vacation, car owners can offer ridesharing services. These sharing economy business models are based on monetizing under-utilized infrastructure. They are enabled by peer-to-peer platforms that match eager sellers with willing buyers. Are there compelling sharing economy opportunities in the electricity sector? What products or services can be shared in tomorrow’s Smart Grid? We begin by exploring sharing economy opportunities in the electricity sector, and discuss regulatory and technical obstacles to these opportunities. We then study the specific problem of a collection of firms sharing their electricity storage. We characterize equilibrium prices for shared storage in a spot market. We formulate storage investment decisions of the firms as a non-convex non-cooperative game. We show that under a mild alignment condition, a Nash equilibrium exists, it is unique, and it supports the social welfare. We discuss technology platforms necessary for the physical exchange of power, and market platforms necessary to trade electricity storage. We close with synthetic examples to illustrate our ideas.more » « less
-
null (Ed.)Abstract We study a new kind of nonzero-sum stochastic differential game with mixed impulse/switching controls, motivated by strategic competition in commodity markets. A representative upstream firm produces a commodity that is used by a representative downstream firm to produce a final consumption good. Both firms can influence the price of the commodity. By shutting down or increasing generation capacities, the upstream firm influences the price with impulses. By switching (or not) to a substitute, the downstream firm influences the drift of the commodity price process. We study the resulting impulse-regime switching game between the two firms, focusing on explicit threshold-type equilibria. Remarkably, this class of games naturally gives rise to multiple potential Nash equilibria, which we obtain thanks to a verification-based approach. We exhibit three candidate types of equilibria depending on the ultimate number of switches by the downstream firm (zero, one or an infinite number of switches). We illustrate the diversification effect provided by vertical integration in the specific case of the crude oil market. Our analysis shows that the diversification gains strongly depend on the pass-through from the crude price to the gasoline price.more » « less
