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Electricity markets typically operate in two stages, day-ahead and real-time.Despite best efforts striving efficiency, evidence of price manipulation hascalled for system-level market power mitigation (MPM) initiatives thatsubstitute noncompetitive bids with default bids. Implementing these policieswith a limited understanding of participant behavior may lead to unintendedeconomic losses. In this paper, we model the competition between generators andinelastic loads in a two-stage market with stage-wise MPM policies. The loss ofNash equilibrium and lack of guarantee of stable market outcome in the case ofconventional supply function bidding motivates the use of an alternative marketmechanism where generators bid an intercept function. A Nash equilibriumanalysis for a day-ahead MPM policy leads to a Stackelberg-Nash game with loadsexercising market power at the expense of generators. A comparison of theresulting equilibrium with the standard market (not implementing any MPMpolicy) shows that a day-ahead policy completely mitigates the market power ofgenerators. On the other hand, the real-time MPM policy increases demandallocation to real-time, contrary to current market practice with mostelectricity trades in the day-ahead market. Numerical studies illustrate theimpact of the slope of the intercept function on the standard market.

Intercept Function and Quantity Bidding in Two-stage Electricity Market with Market Power Mitigation