All FSI Publications Working Papers Program on Energy and Sustainable Development

Market Power Mitigation Mechanisms for Wholesale Electricity Markets: Status Quo and Challenges

June 20, 2021

Market power has been a persistent challenge in designing wholesale electricity markets. Differences in the number or configuration of pricing zones does not impact the ability of a supplier to exercise unilateral market, but only what market outcomes are impacted by this exercise of market power. For this reason, tools able to detect market power conditions are crucial for ensuring the well functioning of all wholesale electricity markets, regardless of number of pricing zones. We first describe the trade-offs that must be balanced in designing a market power mitigation mechanism for any short- term wholesale electricity market. This is followed by a survey of the market power mitigation mechanisms that currently exist in the California Independent System Operator (ISO), the PJM Interconnection, the New York ISO, Mid-Continent ISO, and Electricity Reliability Council of Texas (ERCOT). Finally, we draw lessons from the US experience and try to address potential issues in the adoption of a market power mitigation mechanism in a low carbon electricity market.