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Risk-constrained Optimal Bidding Strategies for Load Server Entities in Transmission and Distribution Separated Electricity Markets
Xingying Chen and Jun Xie
Abstract--In competitive transmission and distribution separated electricity markets, Load Server Entities (LSEs) are required to participate in market competition. The profits of selling electric power to end customers are greatly reduced by lack of supplied power. Or the high electric prices for purchasing electric power are paid out because of over-abundance of supplied power. Obviously, LSEs are faced with risks when they adopt bidding strategies. For the pool based transmission and distribution separated electricity market, on the premise of the supposed market transaction rules, a risk-constrained optimal bidding strategies frame for LSEs is constructed. A normal probability distribution function (pdf) is used to describe the bidding behaviors of rivals, and the problem is then formulated as a multi-objective stochastic optimization one, and solved by a direct optimization method. Finally, taken a market with 3 LSEs, 3 large consumers and 3 generation companies (Gencos) as an example, the proposed bidding strategy model is demonstrated by the simulation results. Index Term-- electricity market, transmission and distribution separation, Load Server Entities (LSEs), bidding strategy, stochastic optimization, risk management

I. INTRODUCTION A competitive electricity market should not only generation-side but also demand-side has competition, i.e. double-sided auction. As far as China is concerned, the reconstructing of power industry is fast, and the electricity markets are now transition from single-buyer model to transmission and distribution separation pattern [1]. In transmission and distribution separated electricity markets, transmission system provide transmission services to all market participants without discrimination, and not only generation companies (Gencos) but also Load Server Entities (LSEs) and large consumers are required to participate in the market competition. As a result, it is essential to carried out electricity market theory research under transmission and distribution separation environment. Strategic bidding in electricity market is one of the key issues of electricity market theory, much work has been done in recent years [2]-[12], and a brief literature survey was made in [13] covering the research work in this area before the year 2000. Basically, three lines of approaches have already been proposed to solve this problem [13]. The first one relays on
Xing-ying Chen is with the School of Electrical Engineering, Hohai University, Nan Jing city, Jiangsu Province, China. (Email:xychen@hhu.edu.cn; xjhhu@sohu.com)

estimations of the market clearing price (MCP) in the next trading period, the second utilizes estimations of bidding behavior of rival participants, and the third is game theory based. Most of the research work is based on the estimation of rivals bidding behaviors by employing available information such as historical bidding data. In this line, discrete probability distribution function [2]-[3], continuous probability distribution function [4], [5], [6] and fuzzy set [7] were employed for this purpose. Up to now, the research work is mainly on generation-side participants, i.e. Gencos, and little work has been done on demand-side participants [9], [10], [11]. In transmission and distribution separated electricity markets, when LSEs adopt bidding strategies, if the bidding price is too low, the profits of selling electric power to end customers will be greatly reduced by lack of supplied power, and if the bidding price is too high, then the high prices for purchasing electric power are paid out because of overabundance of supplied power. As a result, LSEs face certain risks when they make bidding-decision, it is essential for LSEs to manage risks when adopting bidding strategies. Given this background, a framework of developing optimal bidding strategies for LSEs in transmission and distribution separated electricity markets is presented with associated risks appropriately taken into account. A normal probability distribution function is used to describe the bidding behaviors of rivals, a multi-objective stochastic optimization model is built and solved by an efficient direct optimization method. Finally, a numerical example serves to illustrate the essential feathers of the developed model. II.
INTRODUCTIOIN OF THE STUDIED POOL-BASED ELECTRICITY MARKET

A. The structure of the studied electricity market (1) Generation side is separated from transmission system, and Gencos are required to selling power by competition in the pool. (2) Transmission and distribution is separated too, and transmission system is independent from market participants. (3) Distribution and retailing are not separated; LSEs own their distribution system and accordingly their franchise supplying power area.
Jun Xie is with the School of Electrical Engineering, Hohai University, Nan Jing city, Jiangsu Province, China..

1-4244-0493-2/06/$20.00 2006 IEEE.

(4) LSEs and large consumers are required to buying power by competition in the pool. B. The trading protocols of the studied electricity market The bidding strategies adopted must be based on the trading protocols of the electricity market participated, it is useless to design bidding strategies without considering trading protocols. Suppose that sealed auction with a uniform MCP is employed in the market studied. The power trading is done daily, and each day is divided into 24 trading periods, i.e. each trading period is for 1 hour. Before the next trading day starts, bidding for the 24 periods in the next day is conducted in each day. In every period, each registered Genco bids a linear nondecreasing bidding function and generation output limits to the pool, each registered LSE or large consumer bids a linear non-increasing bidding function and demand limits to the pool. The market clearing process is as follows. The Gencos who bid lower prices will be dispatched first, the LSEs and large consumers who bid higher prices will be arranged prior, continue such a procedure until the general generation bidding function and the general demand-side bidding function have an intersection point, and form a uniform MCP.

Now, when the trading protocols adopted, and only the load flow constraints, generation output limits and demand limits are considered, pool determines a set of generation outputs Ps = [ Ps ,1 , Ps ,2 , L , Ps , m ] , a set of LSEs demands Pd = [ Pd ,1 , Pd ,2 , L , Pd , n ] and a set of large consumers demands Pc = [

Pc ,1 , Pc ,2 , L , Pc , r ] by

solving problems (1)-(7). In practice, additional constraints such as transmission capacity constraints need to be included. The procedure of the method presented in this paper can be adapted to the more complex situation, and this will be accounted for in later studies. d ,i d ,i Pd ,i = R i = 1, 2,L , n (1)

c , j c , j Pc , j = R s ,k + s ,k Ps ,k = R

j = 1, 2,L , r k = 1, 2,L , m
m k =1

(2) (3) (4) (5) (6) (7)

P
i =1

d ,i

+ Pc ,r = Ps ,k
j =1

0 Pd ,i Pd ,i max 0 Pc , j Pc , j max

i = 1, 2,L , n j = 1, 2,L , r

Ps , k min Ps ,k Ps ,k max k = 1, 2,L , m

Where R is the uniform MCP to be determined. Pd ,i max is the demand limit of the i th LSE. Pc , j max is the demand limit of the j th large consumer. Ps , k min and Ps , k max are the generation output limits of the k th Genco. When the inequality constraints (5)-(7) are ignored, the solutions to (1)-(4) are:

Figure 1 Market Clearing Process

R=

k =1 m

s ,k
s ,k

+ +
i =1 n

d ,i r c , k + i =1 d ,i j =1 c , j
n

III. PROBLEM FORMULATION Suppose that a market consists of m independent Gencos, n independent LSEs and r large consumers. The i th LSEs marginal demand price is Bd ,i ( Pd ,i ) = d ,i

k =1

1
s ,k

d ,i

+
j =1

(8)

c, j
(9)

Pd ,i =
Pc , j =

d ,i Pd ,i ,

the

d ,i R d ,i

i = 1, 2,L , n
j = 1, 2,L , r k = 1, 2,L , m

j th large consumers marginal demand price is Bc , j ( Pc , j ) = c , j c , j Pc , j and the k th Gencos marginal

supply price is Bs , k ( Ps , k ) = s , k + the active power demand, and

s ,k Ps ,k .
and

Here, Pd ,i is the bidding

d ,i

d ,i

c, j R c, j R Ps , k = s , k s ,k

(10)

(11)

coefficients of the i th LSE; Pc , j is the active power demand, and

c, j

and

c, j

the bidding coefficients of the j th large

When the solution set (9)-(11) violates generation output limits (7) or demand limits (5)/ (6), it must be modified to accommodate these limits [9]: if Ps , k such obtained violates the inequality constrains (7), it should be adjusted as follows: if Ps , k < Ps , k min , set Ps , k =0 rather than Ps , k min and Genco j is removed from the problem since the dispatch is less than the minimum output of the Genco; if Ps , k > Ps , k max , set

consumer; Ps , k is the active power output, bidding coefficients of k th Genco;

s ,k

and

s ,k

the

d , i , d ,i , c , j , c , j ,

s ,k

and

s ,k

are non-negative.

Ps ,k = Ps , k max and fix the dispatched level of this Genco since

it is no longer a marginal unit. Similar treatment is applicable to Pd ,i and Pc , j . Repeat this procedure until the dispatched levels of all market participants are fixed and no constraints violated. The profit of LSE i ( i = 1, 2,L , n ) in a unit time can be described as follows, i = Bdc ,i ( Pdc ,i ) Ci ( Pd ,i ) Pd ,i R (12)

d ,i E ( R ) Pd ,i max i = 1, 2,L , n d ,i

(20)

c, j E ( R) Pc , j max j = 1, 2,L , r (21) c, j E ( R) s ,k Ps , k min Ps ,k max k = 1, 2,L , m (22) s ,k

1/ 2

Bdc ,i ( Pdc ,i ) = Pdc ,i Rdc ,i Pdc ,i = (1 i ) Pd ,i Pdc ,i = Pdc ,io K i Rdc ,i

(13) (14) (15)

Where E ( i ) and D ( i ) = {var( i )}

are the and and

expected value and standard deviation of the profit

E ( R) the expect value of MCP. Weighting

i factors 1

are used to represent the degree of risk averseness of LSE

i , without loss of generality, denote 2 = , 1 = 1 , time when total load demand of its end consumers is Pdc ,i . and then 0 < 1 . Since LSE i does not know the bidding coefficients of Ci ( Pd ,i ) is the operation cost of LSE i in a unit time when
its distribution active power is Pd ,i .

Where Bdc ,i ( Pdc ,i ) is the retail income of LSE i in a unit

is the energy loss rate

of distribution system of LSE i . Rdc ,i is the retail electric price to end consumers of LSE i , which is different from the uniform MCP R and determined by the optimization result of problems (17)-(22) below. Pdc ,io is the forecasted demand of LSE i . K i is nonnegative and used to represent the loadprice elasticity of end consumers of LSE i . If Pd ,i does not violate constraints (5), then Eq. (1) or (9) holds and

rivals before the sealed auction, this optimization problem (17)-(22) could not be solved. However, the bidding coefficients of rivals could be estimated based on historical biding data, load forecast and other available information using mathematical such as those presented in [5], [14], [15]. Suppose that the bidding coefficients of market participants obey jointly normal distributions as follows,
() () 2 () ( ) d,id d,i (d,i ) ,i d,i (d,i , d,i ) ~ N () , () ( ) ( ) 2 (d,i ) d,i d,id,i d,i

can be formulated as follows,

Where

d ,i

i = 1, 2,L , n

(23)

is the correlation coefficient of

( ) d ,i ,

d ,i

and d ,i .

i = Bdc ,i ((1 i )(

d ,i R )) d ,i R R Ci ( d ,i ) R ( d ,i ) d ,i d ,i

( ) d ,i

and

( ) d ,i

and

( ) d ,i

are the parameters of joint

distribution. The marginal distributions of (16) both normal with mean values deviations
( ) d ,i ( ) d ,i

d ,i
( )

and

d ,i

are

and d ,i , and standard

and

( ) d ,i , respectively.

The problem of building an optimal bidding strategy for the LSE i is maximizing profit. Meanwhile, the risks associated with building optimal bidding strategies should also be taken into account. From the well developed investment theory, it is known that the variance of the potential profit could be used to evaluate the risk of an investment. Following this concept [11], the problem of building an optimal bidding strategy of LSE i with associated risks taken into account could be formulated as the following multi-objective stochastic optimization problem, Maximize: ( d ,i , d ,i ) = 1 E ( i ) 2 D( i ) (17) Subject to:

() ( ) 2 ) ( ) c, jc( c, j (c, j ) , j c, j (c, j , c, j ) ~ N ( ) , () ( ) ( ) 2 (c, j ) c, jc, j c, j c, j

j = 1, 2,L , r
The meaning of basically similar to

(24)

( ) c, j

( ) c, j

( ) c, j

( ) c, j

and

c , j

are

( ) ( ) ( ) ( ) d ,i , d ,i , d ,i , d ,i and d ,i .

() () 2 ) ( ) s,ks( s,k (s,k ) ,k s,k (s,k , s,k ) ~ N ( ) , () ( ) ( ) 2 (s,k ) s,k s,ks,k s,k

k = 1, 2,L , m
The meaning of basically similar to

(25)

1 > 0 2 0

(18) (19)

( ) s ,k

( ) s ,k

( ) s ,k

( ) s ,k

and

s ,k

are

( ) ( ) ( ) ( ) d ,i , d ,i , d ,i , d ,i and d ,i .

It is valuable to concern that the bidding behaviors of

market participants are influenced by many random factors. Under such conditions, it is known from central limit theorem in probability theory that the bidding behaviors of market participants asymptotically obey normal distribution, which makes the probability distributions of market participants supposed above is reasonable [16]. IV. A DIRECT OPTIMIZATION BASED METHOD In this paper, the direct optimization based method proposed in [11] is adopted to solve the problems (17)-(22). Denote X be a vector, =2(m+ n+ r)-2,

is the operation benefit function without counting the purchasing cost for electric power to the pool of LSE i in a unit time when its district power is Pd ,i . As a result, Bi ( Pd ,i ) is an important basis for decision-making for LSE i . From (13)-(15), we have,

X = ( x1 , x2 ,L , x ) = ( d ,1 , L , d ,i 1 , d ,i +1 ,L , d ,n ,

P Bi ( Pd ,i ) = (1 i ) dc ,io bd ,i Pd ,i Ki 1 1 2 (1 i ) 2 + cd ,i Pd ,i Ki 2
Denote

(30)

d ,1 , L , d ,i 1 , d ,i +1 ,L , d ,n , c ,1 ,L , c ,r , c ,1 , L , c ,r , s ,1 ,L , s ,m , s ,1 ,L , s ,m ) , and xt is the
expect value of xt ( t =1,2, L , ). We have,

ei

(1 i )

Pdc ,io Ki

bd ,i

fi = (1 i ) 2

1 1 + cd ,i ; the coefficients in (14), (15), (29) Ki 2

1 2 i E ( i ) = i ( X ) + |x = x cov( xl , xm ) (26 2 l =1 m=1 xl xm

)

and demand limits of LSEs are listed in Tabe 1.

TABLE I RUNNING PARAMETERS AND DEMAND LIMITS OF LSES

LSE No.

bd ,i

c d ,i

Pdc ,io

Ki

Pd ,i max

( i ) = E ( ) E ( i )
2 2 i 2

( x
l =1 m=1

i i ) |x = x cov( xl , xm ) l xm
2

1 2 i |x = x cov( xl , xm ) 4 l =1 m=1 xl xm

(27)

1 6.4 0.122 380 3.0 100 2 3.4 0.146 275 2.5 6.0% 60 3 3.4 0.146 275 2.5 80 The electric energy utility function of the j th ( j =1, 2, 3) large consumer is,

E ( R) = i ( X ) +
For maximizing

i 1 |x = x cov( xl , xm ) (28) 2 l =1 m =1 xl xm

2

1 Bc , j = bc , j Pc , j cc , j Pc2 ,j 2

(31)

The coefficients in (31) and demand limits of large consumers are listed in Table 2.
TABLE II ELECTRIC ENERGY UTILITY COEFFICIENTS AND DEMAND LIMITS OF LARGE
CONSUMERS

( d ,i , d ,i )

with the constraints (18)-

(22), the two bidding coefficients

d ,i

and

d ,i

can not be

selected independently, but LSE i can fix one of these two coefficients and then determine another one by using an optimization procedure. In this work, we suppose that d ,i is specified and

d ,i

is to be determined. Thus, the problem of

developing a risk-constrained optimal bidding strategy for LSE i is reduced to a one-dimensional search problem and hence can be well solved by numerical optimization method such as the well-known golden section search method [17]. V. NUMERICAL EXAMPLE Suppose that there are 3 independent LSEs, 3 large consumers and 3 independent Gencos participating in the studied pool-based transmission and distribution separated electricity market. The operation cost function of the ith ( i =1, 2, 3) LSE is,

Large bc , j consumer No. 1 75 2 68.75 3 87.50 The production cost function Genco is,

cc, j

Pc , j m a x

0.1250 85 0.1477 50 0.3343 60 of the k th ( k =1,2, L , 3) (32)

1 Cs ,k ( Ps ,k ) = bs ,k Ps ,k + cs ,k Ps2 ,k 2

The coefficients in (32) and generation output limits are listed in Table 3.
TABLE III PRODUCTION COST COEFFICIENTS AND GENERATION OUTPUT LIMITS OF GENCOS

1 Ci ( Pd ,i ) = bd ,i Pd ,i + cd ,i Pd2,i (29) 2 Denote Bi ( Pd ,i ) = Bdc ,i ( Pdc ,i ) Ci ( Pd ,i ) , then Bi ( Pd ,i )

Genco bs ,k P c s ,k Ps,k max s,k min No. 1 3.4722 0.2500 50 160 2 2.0813 0.3353 20 130 3 5.5356 0.3353 30 150 Suppose that the third LSE is our subject of research. Since electricity market is an oligopoly and hence market

participants have some market power, it is reasonable to assume that Gencos are very likely to bid above its production costs [6], LSEs are very likely to bid under its operation benefit without counting the purchasing cost for electric power to the pool, and large consumers are very likely to bid under its utility. Given such consideration, suppose LSE 3s estimations of the rivals bidding parameters, i.e. the expected values and the standard deviations, are specified as follows,
) ( ) s( , k = 1.2bs , k , s , k = 1.2cs , k ( ) ( ) 3 s , k = 0.15bs , k ,3 s ,k = 0.15cs ,k s , k = 0.1 k = 1, 2,3 ( ) ( ) d ,i = 0.8ei , d ,i = 1.2 2 f i ( ) ( ) 3 d ,i = 0.15ei ,3 d ,i = 0.15 fi d ,i = 0.1 i = 1, 2 ) ( ) c( , j = 0.8bc , j , c , j = 1.2cc , j ( ) ( ) 3 c , j = 0.15bc , j ,3 c , j = 0.15cc , j c , j = 0.1 j = 1, 2,3

well as the expected value and variance of the profit . When varies from 0 to 0.8, the optimal bidding coefficient d ,3 , the expected retail price Rdc ,3 , as well as the expected value and variance of the profit decrease, meanwhile, the expected dispatch level Pd ,3 and the expected MCP R increase. This shows that when LSEs manage risks, they pay out the expense of the decrease of expected profit, but can benefit end consumers.
TABLE IV OPTIMAL BIDDING COEFFICIENTS OF THE NO.3 LSE AND OTHER RESULTS

(33)

0.0 0.5 0.7 0.8

UNDER DIFFERENT

'S AND K 3 =2.5

Rdc ,3

d ,3
0.891 0.838 0.747 0.698

Pd ,3

E( 3 ) 1560 1555 1508 1453

var{ 3 } 3346.2 2255.9 440.8 0.0027

(34)

58.00 61.47 68.60 73.22

48.30 48.47 48.73 48.90

86.80 85.41 82.55 80.71

C. The impact of load-price elasticity of end consumers on optimal bidding strategies Suppose that K 3 =3.0, which means, contrast to K 3 =2.5, the level of load-price elasticity of end consumers to retail price is improved. In this case, for different s, simulation results are listed in Table 5, including optimal bidding coefficient d ,3 and other results.
TABLE V OPTIMAL BIDDING COEFFICIENTS OF THE NO.3 LSE OTHER RESULTS UNDER

(35)

Suppose that LSE 3 fix

d ,3 = e3 , and determines d ,3

by

solving the optimization problem as described by (17)-(22) using golden section method [17]. Obviously, d ,3 should not be less than 1.0 f 3 , otherwise it will have a loss. The search domain for

DIFFERENT

'S AND K 3 =3.0

R
Rdc ,3

d ,3

Pd ,3

E( 3 )

var{ 3 }

d ,3

is specified to be [m1 f 3 , m2 f 3 ] , and

m1 =1.0, m2 =10, since this range is wide enough.

A. Optimal bidding strategies under a given risk coefficient

0.00 0.773 45.16 47.87 76.61 826 272.0 0.20 0.743 46.88 47.93 76.03 825 52.4 0.30 0.723 48.13 47.98 75.62 822 0.0045 Contrast Table 5 with Table 4, at certain risk averseness degree, the optimal bidding coefficient d ,3 and other

When

=0.5, K 3 =2.5, the optimal bidding coefficient is

the dispatched levels of the demand-side are:

d ,3 =0.8382,

=0.3, the expected variance of the profit is approximately equals to 0. This shows that the improved load-price elasticity of end consumers reduces the expected profit of LSEs, but at the same time reduces the bidding risks of LSEs.
VI. CONCLUSION REMARKS (1) A risk-constrained optimal bidding strategy model for LSEs is proposed, which is formulated as a multi-objective stochastic optimization problem and solved by a direct optimization method. (2) When LSEs manage risks, they pay out the expense of the decrease of expected profit, but can benefit its end consumers. (3) Improve the load-price elasticity of end consumers can reduce the operation risks of LSEs, but at the same time reduces the expected profit of LSEs. However, as a preliminary study, power system network constrains and trading in long term contract markets, which

simulation results, except Pd ,3 , are lower. Especially, when

Pd ,1 =83.04MW,

Pd ,2 =52.54MW,

Pd ,3 =61.47MW,

Pc ,1 =76.84MW, Pc ,2 =38.76MW, Pc ,3 =53.66MW; the

dispatched levels of generation-side are: Ps ,1 =147.69MW,

=753.65.

Ps ,2 =114.27MW, Ps ,3 =103.97MW; R =48.47; Rdc ,3 =85.41;

B. Effect of different

For different s, simulation results are listed in Table 4, including optimal bidding coefficient d ,3 , expected dispatch level Pd ,3 , expected MCP R , expected retail price Rdc ,3 , as

s on the optimal bidding strategies

are tightly related to this problem, are not taken into account in this work, and these will be done later studies. VII. REFERENCES
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[2] [3] [4] [5] [6] [7] [8] [9] [10] [11]

[12] [13] [14] [15]

[16] [17]

Biographies Jun Xie received the B.Eng degree from Hohai University, China, in 2002. Currently, he is a Ph.D. candidate in electrical engineering in Hohai University, China. His main area of interest is power system restructuring. Xingying Chen received her B.Eng and Ph.D. degrees from Southeast University, China, in 1984 and 2002, respectively, and M.Eng degree from Hohai University, China, in 1995, all in electrical engineering. She joined the faculty of Hohai University, China, in 1984, and has been professor there since 2002. Her current interest is power system stability, control, automation and restructuring.