Optimal Willingness to Supply Wholesale Electricity Under Asymmetric Linearized Marginal Costs

Abstract

This analysis derives the profit-maximizing willingness to supply functions for single-plant and multi-plant wholesale electricity suppliers that all incur linear marginal costs. The optimal strategy must result in linear residual demand functions in the absence of capacity constraints. This necessarily leads to a linear pricing rule structure that can be used by firm managers to construct their offer curves and to serve as a benchmark to evaluate firm profit-maximizing behavior. The procedure derives the cost functions and the residual demand curves for merged or multi-plant generators, and uses these to construct the individual generator plant offer curves for a multi-plant firm.

Keywords

• Wholesale Electricity, Cost, Willingness to Supply, Linear Analysis, Multi-Plant, Asymmetric