Optimal Bidding Strategy in Electricity Markets Under Uncertain Energy and Reserve Prices

This is a project report from the Power Systems Engineering Research Center (PSERC). PSERC is a multi-university Center conducting research on challenges facing a restructuring electric power industry and educating the next generation of power engineers. More information about PSERC can be found at the Center's website: Notice Concerning Copyright Material PSERC members are given permission to copy without fee all or part of this publication for internal use if appropriate attribution is given to this document as the source material. This report is available for downloading from the PSERC website. Acknowledgements Rajesh Rajaraman gratefully acknowledges support, in part, from Laurits R. Christensen Associates , an economic consulting firm specializing in solutions to business challenges in numerous domestic and international industries including natural gas, electricity, telecommunications, transportation, and postal services. was formed in 1999 to research, develop, and disseminate new methods, tools, and technologies to protect and enhance the reliability of the U.S. electric power system in the transition to a competitive electricity market structure. PSerc was formed in 1996 to draw on the capabilities of multiple universities to creatively address challenges associated with the evolution of the electric power industry into a new business environment. The authors are also grateful to Mary Cain and David Watts of the University of Wisconsin and to Dennis Ray of PSerc, for their valuable comments and suggestions. i Executive Summary This report describes the mathematics of finding optimal bidding strategies in multi-period electricity market auctions of energy and reserve markets, taking full account of generator costs and operating constraints, and exogenous price uncertainty. The operational constraints of the generator include such items such as minimum up and down times, minimum power production requirements, maximum ramp times. The report addresses five specific concerns: bidding into multiple markets, the impact of market design rules (particularly the requirement that bids be non-decreasing with increasing amounts offered), the non-convexity of cost curves (often the results of start-up and shutdown costs), the effect of inter-temporal constraints, and the effect of price uncertainty. The analysis of this problem requires the use of nested Dynamic Programming (DP) techniques; in particular, we show how to use the innermost-nested DP to find a bidding function that satisfies market design rules. This type of analysis provides new insights into anticipated market behavior in auctions. The methods offered in the report are practical to implement and have minimal data needs. The methods are applicable …