Retail Equilibrium with Switching Consumers in Electricity Markets

Abstract

The ongoing transformations of power systems worldwide pose important challenges, both economic and technical, for their appropriate planning and operation. A key approach to improve the efficiency of these systems is through demand-side management, i.e., to promote the active involvement of consumers in the system. In particular, the current trend is to conceive systems where electricity consumers can vary their load according to real-time price incentives, offered by retailing companies. Under this setting, retail competition plays an important role as inadequate prices or services may entail consumers switching to a rival retailer. In this work we consider a game theoretical model where asymmetric retailers compete in prices to increase their profits by accounting for the utility function of consumers. Consumer preferences for retailers are uncertain and distributed within a Hotelling line. We analytically characterize the equilibrium of a retailer duopoly, establishing its existence and uniqueness conditions for a wide class of utility functions. Furthermore, sensitivities of the equilibrium prices with respect to relevant model parameters are also provided. The duopoly model is extended to a network that includes multiple retailers with capacity constraints for which we perform static and dynamic numerical simulations. Results indicate that, depending on the retailer costs, loyalty rewards and initial market shares, the resulting equilibrium can range from complete competition to one in which a retailer has a leading or even a dominant position in the market, decreasing the consumers’ utility significantly. Moreover, the retailer network configuration also plays an important role in the competitiveness of the system.