How Good are Supply Function Equilibrium Models: An Empirical Analysis of the ERCOT Balancing Market

We present an empirical analysis of a supply function equilibrium model in the Texas spot electricity market. We derive condititions for optimal bidding behavior in a spot market with ex ante bilaterally contracted sales. By using generation cost information, we are able to derive a set of ex post- and ex ante-optimal supply functions and use a nonparametric model of firm behavior to compare our theoretically-optimal supply functions to actual offers made in years 2002 and 2003. Our results show that with markups and markdowns far in excess of what a model of profit-maximizing behavior suggests. For small generators, municipalities, and cogenerators we find evidence suggesting these firms may be acting to exclude themselves from the market by economically witholding their generation.By using partial-linear behavior model we demonstrate some learning effects to have taken place during the first quarter of 2002