Market power and welfare effects in DC power flow electricity models with thermal line losses Rastislav Ivanic a , Paul V. Preckel a, * , Zuwei Yu b a Department of Agricultural Economics, 1145 Krannert Building, Purdue University, West Lafayette, IN 47907-1145, United States b State Utility Forecasting Group, Purdue University, West Lafayette, IN, United States Available online 22 October 2004 Abstract A nodal electric power network with Cournot–Nash interaction among power generators is formulated as a mixed complementarity problem. The model incorporates a direct current (DC) power flow approximation with thermal line losses to model real-time flows. We include constant wheeling rate and variable congestion charges for transmission of electricity. Market power and welfare effects are measured in an aggregated Indiana electric grid model. We find that imposing DC power flow constraints in a model results in significant changes in social welfare estimates. Line losses are also an important factor affecting market power and welfare of market participants in the case study. D 2004 Elsevier B.V. All rights reserved. Keywords: Electricity markets; Imperfect competition; Welfare measurement; Thermal line losses 1. Introduction Much attention in the literature has been paid to the study of deregulation of electricity markets. Issues such as transmission pricing and deregulated market structure have been the most prominent. A compre- hensive survey of recent literature is presented in Ref. [5]. Here, we focus on studying market power and social welfare—major issues in deregulated markets. The central issue in this paper is the effect of physical properties of electric power networks on market power and consumers’ welfare in the real-time dispatch problem. The physical properties discussed in this paper are a direct current (DC) power flow approx- imation, thermal line limits, and thermal line losses. Current transmission pricing in the U.S. deregu- lated electricity markets consists of fixed wheeling charges and congestion charges. The fixed wheeling charges are used to recover transmission capital costs while congestion charges provide funds for future expansion of transmission capacity. Fixed wheeling charges have been posted on various OASIS (Open Access Same Time Information Systems) systems as requested by the FERC. Our paper is the first to consider both charges in a noncooperative gaming model. 0167-9236/$ - see front matter D 2004 Elsevier B.V. All rights reserved. doi:10.1016/j.dss.2004.09.003 * Corresponding author. Tel.: +1 765 494 4240; fax: +1 765 494 9176. E-mail address: preckel@purdue.edu (P.V. Preckel). Decision Support Systems 40 (2005) 529 – 542 www.elsevier.com/locate/dsw