Optimal Bidding and Contracting Strategies in the Deregulated Electric Power Market: Part I

We study the interaction of long-term contracting and spot market transactions between Multi-Gencos and MultiDiscos for electric power. Gencos and Discos may either contract for delivery in advance or they may sell/buy some or all of their output/input in a spot market. Contract pricing involves both a reservation fee per unit of capacity and an execution fee per unit of output if capacity is called. Discos’ optimal portfolios are shown to follow a merit order (or greedy) shopping rule. When Gencos properly anticipate demands to their bids, then bidding a contract execution fee equal to variable cost dominates all other bidding strategies. The optimal capacity reservation fees are determined by Gencos to trade off the risk of underutilized capacity against unit capacity costs. Existence and structure of market equilibria are characterized for the associated competitive game between Gencos.