Pricing in electricity markets

The technical characteristics of electricity generation and transmission ha ve implications for the way in which economic principles are adapted to eva luate pricing and regulation issues in electricity markets. In particular, there is an externality associated with the way in which electricity flows in networks because of Kirchoff's laws. In this paper, a mathematical progr amming model is presented that simulates a competitive electricity market, based on the spatial-intertemporal equilibrium models pioneered by Takayama and Judge (1971). The model is used to simulate the operation of a hypothe tical electricity market, illustrating some of the issues arising from the network externality. (C) 2001 Society for Policy Modeling. Published by Els evier Science Inc.