Market Power in Deregulated Power System

Market Power in Deregulated Power System

Mohammad Quadeer Fahad (Jamia Millia Islamia, India), Mohd Tauseef Khan (Jamia Millia Islamia, India) and Anwar Shahzad Siddiqui (Jamia Millia Islamia, India)
Copyright: © 2018 |Pages: 31
DOI: 10.4018/978-1-5225-3935-3.ch014


In today's competitive market, deregulation of power industry is inevitable. The aim of deregulating the power markets is to bring competition into them and thereby make them more economically efficient. In an economically efficient market, no consumer or producer has the ability to impact on prices by itself or by collaborating with any other participant. However, the electricity wholesale market is not a perfect market and the potential for market power exploitation is an issue. Sometimes private companies collaborate with each other to get more profit, driving the prices to a higher level and thus acquiring a market power which is an anti-competitive practice. Thus, market power is the capability of a seller or a group of sellers to profitably maintain the prices above a competitive level and control the total output for a noteworthy period of time.
Chapter Preview


In recent years, large evolution of electrical power system has been observed around the world. Traditional electricity market was a Vertically Integrated Utility (VIU) i.e., a single company runs the whole chain of production on its own and is being indicted in Figure 1. In the vertically integrated market, the company serves as a producer, a transmission owner, a distributor and as the system operator in every geographical area. They serve as the only electricity provider in a region and consumers have no choice but to purchase the electrical power from its local electric company. However, in order to prevent companies from abusing their market positions, this market structure is regulated thereby making certain rules and obligations which companies have to follow. Since, every company is responsible of all elements in their own system, investments in production, transmission and distribution are more easily coordinated. Also, the technical solution, in order to keep a secure transmission of electricity in the system, is handled with fewer complications.

Figure 1.

Vertically integrated utility

The vertically integrated utility only accounts for the information flow between the generators and the transmission system, it does not account for the information flow between the consumers and distribution system nor it does consider the pattern of consumption of the consumers. The basic objective of an operator in a VIU is to minimize total cost considering the system constraints. VIU had a centralized system of planning for long-term generation, transmission expansion, maintenance, production and fuel scheduling.

The drawbacks of this type of market are:

  • 1.

    The company exerts its monopoly in the market.

  • 2.

    Cost of energy is high.

  • 3.

    Consumers are not given any choices to choose from.

  • 4.

    It has no incentives to operate efficiently.

  • 5.

    Money flow is unidirectional, i.e. from the consumer to the electric company.

  • 6.

    Information exchange exists only between the generation and the transmission systems.

  • 7.

    Customers are often charged on a regular tariff rate depending on the accumulated cost during a period.

  • 8.

    Customers are not given any incentives to use the electrical power in the off-peak period.

Because of these drawbacks, vertically integrated utility model of the electrical industry has to be changed. With the success in privatization of the airline, telecommunication industry, power industry has also been motivated to restructure and adopt deregulation. Although, privatization on electricity markets was introduced already in the 1970s, it took until the 1990s before a larger trend in deregulation was established. Chile was first to bring competition into the electricity market, but the model they emphasized had its flaws and the market suffered from its poor structure. One key event that really started deregulation worldwide came in 1989 when the UK Government decided to privatize its vertically integrated electricity industry (Lai, 2001). Norway and California followed in 1990 and 1996 respectively.

Key Terms in this Chapter

Deregulation: Disintegrating or unbundling the existing power system into the basic components of generation, transmission, and distribution and offering each component separately for sale with separate rates.

Market Power: Market power is the ability to raise the prices above the competitive level without affecting the generator’s dispatch.

Facts: A flexible alternating current transmission system (FACTS) is a system composed of power electronics components used for the AC transmission of electrical energy to enhance controllability and increase power transfer capability of the network.

TCSC: Thyristor controlled series compensation is a well-established technology which is used to reduce the transfer reactance in the transmission line in order to provide sufficient load compensation.

DG: Distributed generation (DG) also referred by the name of on-site generation is a small capacity (1 KW to 10,000 KW) generating plant which provides an alternative route for the enhancement of traditional power system.

STATCOM: Static synchronous compensator (STATCOM) is a shunt device of the flexible AC transmission systems (FACTS) family using power electronics to control power flow and improve transient stability on power grids.

Regulation: The rules or set of instructions that are followed by an operator or organization for the efficient and reliable operation of a power system.

Complete Chapter List

Search this Book: