Modeling and Detecting Bidding Anomalies in Day-ahead Electricity Markets

Virtual bids were introduced in U.S. wholesale electricity markets to exploit arbitrage opportunities arising from expected price differences between day-ahead and real-time energy markets. These financial instruments have interactions with other elements of the electricity market design. For instance, virtual bids could affect day-ahead market-clearing prices so as to enhance the value of Financial Transmission Rights (FTRs) that settle at those energy prices. We consider a model of the day-ahead electricity market at one node in the network, under the assumption that real-time prices are not affected by virtual bidding. Theoretical results on interior Nash equilibria are given, assuming virtual bidders can perfectly predict real-time prices and hold no FTRs. We then adopt a hypergame framework to model the day-ahead market, assuming imperfect prediction of real-time prices by different virtual bidders, and present simulation results with and without FTRs. Finally, we discuss two detection mechanisms that could be used by regulators to distinguish between competitive and anti-competitive market outcomes, as well as trade-offs between specificity and sensitivity.