Energy studies review, 2013, Vol. 20, No. 1, pp. 34-64

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In this paper we study the economic consequences of two real-time electricity market designs (with or without penalties) taking into account the opportunistic behaviors of market players. We implement a two-stage dynamic model to consider the interaction between the forward market and the real-time market where market players compete in a Nash manner and rely on supply/demand function oligopoly competition. Dynamic programming is used to deal with the stochastic environment of the market and the mixed complementarity problem is employed to find a solution to the game. Numerical examples are presented to illustrate how the optimal competitor's strategies could change according to the adoption or no adoption of a balancing mechanism and to the level of the penalty imposed on imbalances, regarding a variety of producers' cost structures. The main finding of this study is that implementing balancing mechanisms would increase forward contracts while raising electricity prices. Moreover, possible use of market power would not be reduced when imbalances are penalized.