Robust Risk Management of Retail Energy Service

Providers in Midterm Electricity Energy Markets

under Unstructured Uncertainty
Jamshid Aghaei 1; Mansour Charwand 2; Mohsen Gitizadeh 3; and Alireza Heidari 4
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Abstract: Retailers purchase electric energy from the wholesale market and sell it to the customers at regulated fixed prices in deregulated
power systems. A retailer has multiple choices for electricity procurement, such as spot market, bilateral contracts, and a self-generating
facility. However, the retailer faces challenges such as the pool price and electricity demand uncertainty. To meet these challenges, this paper
proposes a midterm framework based on the information gap decision theory (IGDT) to evaluate the robust or opportunity strategy. In this
approach, the composition of two conflicting portfolio investment goals is considered including obtaining high expected portfolio return and
selling price designation, as well as controlling risk. A real case study is used to demonstrate the effectiveness of the proposed framework.
DOI: 10.1061/(ASCE)EY.1943-7897.0000462. © 2017 American Society of Civil Engineers.
Author keywords: Retailer; Risk; Portfolio optimization; Information gap decision theory.

Introduction stochastic programming method to specify the amounts of power

Retailers participate in power markets by purchasing electricity via
bilateral contracts with generating companies or from the electricity
pool markets and then selling it to their customers. Additionally,
retailers have contracts with customers to supply their demand with
prespecified selling prices. Consequently, retailers have a mediator
role by signing contracts with both the demand-side and the sup-
pliers in power markets (Shang et al. 2014).
The objective of the retailers is the maximization of profit. How-
ever, the retailer must tackle variable pool prices, demand forecast
errors, and the possibility of customers selecting different suppliers
if the retailer cannot offer a competitive selling price. Accordingly,
after selecting the selling price and making decisions regarding fu-
ture market involvement, the retailer needs to resolve its purchases
and sales in the pool markets (Mazer 2007).
Literature Review
The perspective of the retailer has been addressed in technical lit-
erature. Carrión et al. (2007) and Hatami et al. (2009) proposed a
1
Associate Professor, Dept. of Electrical and Electronics Engineering,
Shiraz Univ. of Technology, 71557-13957 Shiraz, Iran (corresponding
author). E-mail: aghaei@sutech.ac.ir
2 sented a game-theoretical model for the participation of energy
Ph.D. Student, Dept. of Electrical and Electronics Engineering, Shiraz
Univ. of Technology, 71557-13957 Shiraz, Iran. E-mail: m.charvand@
sutech.ac.ir
3
Associate Professor, Dept. of Electrical and Electronics Engineering,
Shiraz Univ. of Technology, 71557-13957 Shiraz, Iran. E-mail: gitizadeh@
sutech.ac.ir
4
Ph.D. Student, Australian Energy Research Institute and School of
Electrical Engineering and Telecommunications, Univ. of New South
Wales, Sydney, NSW 2052, Australia. E-mail: alireza.heidari@unsw
.edu.au
Note. This manuscript was submitted on June 15, 2016; approved on
February 16, 2017; published online on May 11, 2017. Discussion period
open until October 11, 2017; separate discussions must be submitted for
individual papers. This paper is part of the Journal of Energy Engineering,
© ASCE, ISSN 0733-9402.
that can be purchased from the pool market and forward contracts
as well as the optimum selling price provided by the retailers for
customers at a fixed price. The self-production facility and call op-
tion strategies were also considered by Hatami et al. (2009). Garcia-
Bertrand (2013) proposed a procedure to determine the energy
procurement by a retailer and the optimum price while considering
an acceptance function to model the behavior of the customer.
Carrión et al. (2007) presented an idea, later developed by Carrión
et al. (2009), in which a bilevel programming model was proposed
to take into account competition among retailers and the client
response to selling prices.
Kettunen et al. (2010) presented a stochastic programming
model to define the retailer’s optimal contract portfolio. Also,
Boroumand and Zachmann (2012) demonstrated that the physical
hedging that is supported by forward contracting and spot transac-
tions can be an efficient approach for risk management in decen-
tralized electricity markets. Charwand et al. (2014a, 2015) provided
a multiobjective decision framework to simultaneously maximize
retailers’ profit and minimize selling prices to clients in order to
achieve the highest possible number of clients. Feuerriegel and
Neumanno (2014) proposed an optimization problem that mini-
mizes procurement costs of an electricity retailer in order to control
demand response (DR) usage as a result of the integration of inter-
mittent resources of power generation. Zugno et al. (2013) pre-
retailers in electricity markets with flexible demand and real-time
consumer prices.
Carrión et al. (2007, 2009), Hatami et al. (2009), and Kettunen
et al. (2010) quantified the risk factor using the conditional value-
at-risk (CVaR) index; however, Lim et al. (2011) investigated the
estimation errors associated with CVaR in the context of an opti-
mization problem and showed that the portfolios obtained by using
the CVaR index are fragile and not reliable. So, the expected down-
side risk index was applied by Ahmadi et al. (2013) to hedge risks
attributable to uncertainties.
Wei et al. (2015) proposed a two-stage, two-level model for the
energy pricing faced by a retailer, in which the demand response of
consumers is characterized by a Stackelberg game in the first stage

© ASCE 04017030-1 J. Energy Eng.

J. Energy Eng., 2017, 143(5): -1--1

 [as done by Jia and Tong (2016) and Yu and Hong (2016)] and a
risk-aversive energy dispatch model is modeled by a linear optimi-
zation in the second stage. Jia and Tong (2016) examined the ef-
fects of integrating renewable energy sources and local storage.
Also, Yu and Hong (2016) proposed an algorithm based on
real-time pricing for achieving optimal load control of devices
in a facility by forming a virtual electricity-trading process. Wei
et al. (2015) proposed a risk-aversive decision model for a retailer
to offer a nondominated bidding strategy when the retailer intends
to maximize daily profit using a two-step robust linear program-
ming algorithm. Considering an optimal investment problem for
a retailer in the electricity market, He et al. (2015) provided the
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optimal solution that maximizes the weighted sum of the expected
return and the variance of the wealth. From the short-term sched-
uling point of view, a robust optimization approach for a retailer
considering the effect of demand response programs was developed
by Nojavan et al. (2015a).
IGDT Background and Stochastic Optimization
Decision-making problems in electricity markets are plagued with
uncertainty. Stochastic programming is one of the methods to deal
with uncertainty and can provide an accurate modeling framework
in which the problems of decision making under uncertainty are
properly formulated. Stochastic programming relies on the knowl-
edge of the stochastic processes describing the uncertain parame-
ters, e.g., the pool price. Once the uncertain parameters are modeled
using the stochastic processes, it is possible to formulate a math-
ematical programming problem that takes into account the uncer-
tainty of these parameters. For structured modeling purposes, each
uncertain parameter is modeled by a set of finite outcomes or sce-
narios, where each outcome represents a plausible realization of the
uncertain parameters with the respective probability of occurrence.
The number of outcomes is needed to properly represent an uncer-
tain parameter. In some approaches, the uncertainty of a parameter
is modeled using probability and possibility theories based on the
distribution functions to model and measure the trading risk. Fur-
thermore, fuzzy logic–based models use prespecified membership
functions to model uncertainty. Similarly, Monte Carlo simulation–
based approaches need to guess a probability density function for
the uncertain variable to generate the scenarios. Making such
assumption can sometimes lead to nonprotective conclusions, as
further discussed by Ivatloo et al. (2013) and Gabriel et al.
(2004). IGDT methods have practical advantages over scenario-
based methods. In the case of retailer planning, an IGDT-based
model determines optimal schedules in order to achieve a target
profit, whereas scenario-based methods find optimal schedules
based on the limited number of possible price scenarios. In addi-
tion, unlike scenario-based models, IGDT-based methods guaran-
tee a predefined level of profit. An IGDT model, on the other hand,
neither requires a particular assumption about the nature of the
uncertain parameter nor enforces any preassumption on the size
of the uncertainty (unstructured uncertainty). In fact, the different
scenario generation methods can result in different solutions, espe-
cially with stochastic methods (Ben-Haim 2006). Also, in the sce-
nario generation methods and the fuzzy-based approaches, the
probability density function and the specific membership function
of the uncertain parameters should be extracted, respectively.
The IGDT method has already been used in the optimal bidding
strategy of a generation company (Ivatloo et al. 2013; Kazemi et al.
2015), hydrothermal scheduling (Charwand et al. 2016), combined
heat and power (CHP) unit commitment (Aghaei et al. 2016), and
energy purchasing strategies for large customers (Zare et al. 2010,
2011). Also, Soroudi and Ehsan (2013b) presented the application
© ASCE 04017030-2
J. Energy Eng., 2017, 143(5): -1--1
of the IGDT for distribution network operators (DNOs) to choose
a supply resource. Charwand and Moshavash (2014b) proposed an
IGDT-based technique under pool price uncertainty to evaluate the
robust strategy for a retailer. However, Charwand and Moshavash
(2014b) did not consider the uncertainties associated with the retail-
er’s demand. Kharrati et al. (2016) proposed an IGDT-based
approach to solve a retailer’s midterm planning problem. They
modeled the uncertainty of pool prices with an IGDT model
and considered demand uncertainty via a scenario generation
method (using Monte Carlo simulation with 10 scenarios). The
Karush-Kuhn-Tucker (KKT) optimality conditions were used to
convert the problem into a robust optimization problem. Nojavan
et al. (2015b) proposed an IGDT-based model to obtain the optimal
bidding strategy for a retailer that should be submitted to the pool
market.
Considering a midterm horizon, this paper proposes a risk-based
model decision for the retailer based on information gap theory.
The IGDT models reveal plausible solutions at times when the in-
formation is difficult to access and the system is exposed to pivotal
changes regardless of current conditions. By analyzing the results,
the proposed method can help the retailer to determine its con-
tracting and selling strategy. The similarities and differences among
the robust optimization (RO) technique, IGDT, and min-max regret
optimization can be found in detail in the Appendix I.
Contributions
The main contribution of this paper in comparison with the conven-
tional stochastic programming approach is that the proposed ap-
proach only needs a deterministic uncertainty set, instead of a
hard-to-obtain probability distribution function with uncertain data.
By optimizing the robustness strategy instead of maximizing the
retailer’s profit, the proposed model ensures a minimum allowable
profit using the forecasted data. In addition to the pool price un-
certainty, since the modeling of the load uncertainty is very impor-
tant in the midterm planning, comparing with the works of
Charwand and Moshavash (2014b) and Kharrati et al. (2016),
the uncertainties associated with the retailer’s demand have been
considered in this paper using the IGDT method. Also, in addition
to pool market and bilateral contracts, a generating facility is con-
sidered as a procurement option. The problem has been solved
as a multiobjective problem to generate Pareto-optimal solutions.
Table 1 shows the main differences of this work with respect to the
previous ones in detail.
Paper Organization
The rest of the paper is structured as follows: The section “Problem
Formulation” deals with the decision-making problem formula-
tion confronted by the retailer. The section “IGDT Analysis” pres-
ents the proposed IGDT-based solution approach. The section
“Case Study” copes with the performance of the proposed solu-
tion implementation. Finally, conclusions are drawn in the section
“Conclusion and Future Work.”
Problem Formulation
The main goal of the proposed method is to decide on four oper-
ation variables for the retailer in the midterm horizon, namely,
bilateral contracting decisions, self-production, grid purchasing
and selling price under pool price, and demand uncertainty. It is
assumed that the risk premiums are included in the bilateral con-
tracts. Accordingly, the problem formulation has been extracted in
the following subsections.
J. Energy Eng.
 Table 1. Taxonomy of the IGDT Solution in the Electricity Market Strategies
Uncertain parameter(s) Planning Strategy Base
Reference Decision maker in IGDT method horizon determination objective
Kazemi et al. (2015) Genco Pool price Short-term Selling energy Maximum profit
Charwand et al. (2016) Hydrothermal Demand Short-term Selling energy Minimum cost
Aghaei et al. (2016) CHP Pool price Short-term Selling energy Maximum profit
Zare et al. (2010, 2011) Large consumers Pool price Midterm Purchasing Minimum cost
Soroudi and Ehsan (2013b) Distribution network operators Pool price and demand Midterm Purchasing Minimum cost
Charwand and Moshavash Retailer Pool price Midterm Purchasing and Maximum profit
(2014b) selling price
Nojavan et al. (2015a) Retailer Pool price Short-term Bidding Minimum cost
This work Retailer Pool price and demand Midterm Purchasing and selling price Maximum profit
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Energy Supply Resources for the Retailer facilities and the sum of the traded electricity in the pool market
should be nonnegative during the time horizon.
Bilateral Contract
The constant power price transactions during a given period of time
Supplying Demand
can be included in the bilateral contracts that the retailer imple-
ments to reduce the risk of the volatility of the pool price. Pur- It is assumed that the client’s behavior is dependent upon the selling
chased energy via the bilateral contracts is formulated as follows: price, which is shown by ρðeÞ. Therefore, higher values of ρðeÞ will
cause the client to reduce its demand from the retailer. According to
X
B X
T
Carrión et al. (2007), this behavior is modeled using a stepwise
CB ¼ γðb; tÞPB ðb; tÞkðtÞ ð1Þ
price-quota curve (Fig. 1), which shows that a competitive price
b¼1 t¼1
should be paid for a determined amount of electricity. In formulas
B ðbÞZðbÞ ≤ PB ðb; tÞ ≤ PB ðbÞZðbÞ;
Pmin ∀ t ∈ T; ∀b∈B
max
X
I

ð2Þ Dðe; tÞ ¼ D̄ðe; i; tÞYðe; iÞ; ∀ t ∈ T; ∀e∈E ð8Þ

i¼1
Eq. (1) presents the cost of purchased energy from the bilateral
contract and Eq. (2) expresses the maximum and minimum amount X
I

of purchased energy. ρðeÞ ¼ ρðe; iÞ; ∀e∈E ð9Þ

i¼1
Pool Trading
The retailer takes part in the pool market in order to satisfy a certain ρ̄ðe; i − 1ÞYðe; iÞ ≤ ρðe; iÞ ≤ ρ̄ðe; iÞYðe; iÞ; ∀ e ∈ E; ∀i∈I
amount of its load. However, the retailer can either purchase or ð10Þ
sell energy if profitable. The net transaction cost in the pool is
as follows: X
I
XT Yðe; iÞ ¼ 1; ∀e∈E ð11Þ
CP ¼ λðtÞPP ðtÞ ð3Þ i¼1
t¼1
Eqs. (8)–(11) model a step function relationship between de-
mand of each client group and time slot, Dðe; tÞ, and selling price,
Self-Production
ρðeÞ, in which by increasing the offering price, the supplied de-
A piecewise linear function has been considered as the energy op-
mand would be decreased. ρðeÞ is the selling price settled by
eration cost model for the generating facilities as done by Ahmadi
the retailer for the client group e. To make output easier and more
et al. (2013). Eq. (4) shows the energy operation cost of the avail-
obvious than ρðe; iÞ, this variable is used.
able generating units
X
T X
G D(e, t)
CG ¼ πðgÞEG ðg; tÞ ð4Þ (MWh)
t¼1 g¼1

D(e,1, t)
0 ≤ EG ðg; tÞ ≤ Emax
G ðgÞ − EG ðg − 1Þ;
max
∀ t ∈ T; g ¼ 2; : : : ; G
ð5Þ D(e, 2, t)

0 ≤ EG ð1; tÞ ≤ Emax
G ð1Þ; ∀t∈T ð6Þ
….
X
G
EG ðg; tÞ þ PP ðtÞ ≥ 0; ∀t∈T ð7Þ D(e, I, t)
g¼1
ρ(e,1) ρ(e, 2) ρ(e, I) ρ(e)
Constraints (5)–(7) are relevant to the operation of the generat- ($ / MWh)
ρ(e, 0) ρ(e,1) ρ(e, 2) ρR(l, I)
ing facilities and express the maximum amount of selling energy in
the pool market by the generating units’ capacity. It is expressed by
Fig. 1. Price-quota curve
constraint (7) that the electricity produced by the generating

© ASCE 04017030-3 J. Energy Eng.

J. Energy Eng., 2017, 143(5): -1--1

 Based on the stepwise price-quota curve, the revenue gained
from providing electricity to the customers is calculated as follows:
X
I
Rðe; tÞ ¼ D̄ðe; i; tÞρðe; iÞ; ∀ t ∈ T; ∀e∈E ð12Þ
i¼1
Fig. 2. Price band
Constraint (13) indicates the electricity balance for the retailer in
each period of each scenario as follows:
X  and a related joint variance–covariance matrix. However, in this
XE X I B XG
paper the unstructured uncertain parameters (pool price and de-
D̄ðe;i;tÞYðe;iÞ ¼ PB ðb;tÞkðtÞ þ EG ðg;tÞ þ PP ðtÞ ;
mand) are supposed (without any distribution function). Accord-
e¼1 i¼1 b¼1 g¼1
ingly, the envelope bound is used.
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∀t∈T
Accordingly, the retailer’s objective function ½Jðd; xÞ is as
follows:
T X
X E X I
Max profit∶ ρðe; iÞD̄ðe; i; tÞ − λðtÞPP ðtÞ
t¼1 e¼1 i¼1
X
B X
G 
− γðb; tÞPB ðb; tÞkðtÞ − πðgÞEG ðg; tÞ
b¼1 g¼1
IGDT Analysis
The common problems associated with decision making are when
the reliable data to make the base decisions is spare or when the
problem parameters (i.e., pool price and demand in this paper) are
poorly understood. In this regard, the IGDT is developed as a
powerful tool to make decisions under unstructured uncertainty
without needing the membership or probability density functions.
Ben-Haim (2006) gave a complete review on uncertainty modeling
approaches for power system studies that makes sense of the
strengths and weaknesses of different methods. Methods were
classified into different categories, including probabilistic, possibil-
istic, joint possibilistic-probabilistic, IGDT, robust optimization
(RO), and interval analysis. IGDT measures the information gap
between the predicted and actual values of an uncertain parameter
to provide a robust strategy against losses and an opportunistic
strategy to windfall benefits, without sacrificing the performance
requirements.
Process Model and Performance Requirements
The prior information about the uncertain variable is included in the
IGDT model of the uncertainty. The gap between unknown and
known values as a function of known parameters (i.e., the fore-
casted value of the uncertain parameter, standard deviation, etc.)
can be expressed by the uncertainty model. The IGDT consists
of several models to present the uncertainty of parameters. In this
paper, the envelope-bound model is taken from the work of Zare
et al. (2010), as follows:
  
 x − x~ 
~
Uðμ; xÞ ¼    ≤ μ; μ ≥ 0 ð15Þ
x~ 
where μ = uncertainty horizon of parameter x and x~ = predicted
value of x. An envelope-bound model (Fig. 2) is used in which
the magnitude of deviation is proportional to the forecasted value.
Another uncertainty model is the weighted mean-square error
(WMSE) (Ben-Haim 2006; Zare et al. 2011). The WMSE model,
unlike the envelope-bound model, assumes that the pool prices
have normal distribution functions with estimated average values
ð13Þ The aim of employing the IGDT method is to assist the decision
maker (DM) in setting the decision variables to the values in such a
way to avoid the risk of not obtaining the minimum necessities
while there are uncertainties of uncontrollable parameters. The per-
formance requirements that explain the requirement from the
objective function can be shown in terms of profit function. The
robustness and opportunity functions are used to evaluate these
necessities.
ð14Þ An info-gap robustness function, μ̂ðd; J c Þ, would be interpreted
as the maximum value that μ takes in such a way that the minimum
required or desired profit of the problem indicated by J c, is met,
i.e.
n o
μ̂ðd; J c Þ ¼ max μ∶ min Jðd; xÞ ≥ J c ð16Þ
μ ~
x∈Uðμ;xÞ
In fact, this function expresses the risk-aversion aspect of the
retailer strategy. Jðd; xÞ is the retailer’s objective function (profit).
This variable is a function of the decision variables (d) and uncer-
tain parameters (x). The opportunity function, β̂ðd; J w Þ, indicates
the possibility of getting a higher profit derived from desired
variations of uncertain parameters. This function is a kind of invio-
lability against windfall profit and shows the risk-taking possibility
of an optimal strategy for a retailer. In other words, in the com-
petitive market environment, knowing the behavior of the other
participants can increase the benefit of each participant. Conse-
quently, the strategy of each participant is a kind of secreting
for other participants. For that reason, all market players should
make their strategy with lack of knowledge about other competi-
tors. Accordingly, the info-gap model can provide this opportunity
to have a desired level of profit in the presence of uncertainties.
The corresponding formulation can be expressed by the following
minimization problem:
n o
β̂ðd; J w Þ ¼ min μ∶ max Jðd; xÞ ≥ J w ð17Þ
μ ~
x∈Uðμ;xÞ
The opportunity function [denoted here by β̂ðd; J w Þ] is defined
to evaluate the possibility of achieving a higher profit resulting
from desired variations of the uncertain parameter. J w is the tar-
geted higher profit that may be achieved if the uncertain parameter
favorably deviates from the forecast value by at least β̂. In fact,
β̂ðd; J w Þ is the minimum value of the decision that can endure
and still obtain the high profit denoted by J w.
IGDT Model for the Retailer
Considering a midterm horizon, an IGDT-based model has been
developed for a retailer. To evaluate the robustness of decisions,
a risk-averse model is proposed against conditions of low demand
and high pool prices, in which decisions are robust against low
profits. Furthermore, the retailer is able to analyze its selling price
and portfolio strategy from the results of the proposed method.

© ASCE 04017030-4 J. Energy Eng.

J. Energy Eng., 2017, 143(5): -1--1

 Robust Strategy μ̂ðd; J c Þ ¼ maxðα or ζÞ
T X
A risk-averse retailer tends to schedule so that it is not exposed to
X E X I
losses or low profit attributable to undesired deviations in pool pri- subject to ~
ρðe; iÞð1 − ζÞDðe; i; tÞ
ces and demand from the forecasted value. Thus, the robust func- t¼1 e¼1 i¼1
tion is stated as X
B
n o ~
− ð1 þ αÞλðtÞP P ðtÞ − γðb; tÞPB ðb; tÞkðtÞ
μ̂ðd; J c Þ ¼ max μ∶ min Jðd; xÞ ≥ J c ¼ ð1 − σÞJ 0 ð18Þ b¼1
μ ~
x∈Uðμ;xÞ
X
G 
− πðgÞEG ðg; tÞ ≥ ð1 − σÞJ 0
J 0 is considered the maximum profit on the basis of the fore- g¼1
casted prices and demand, i.e., the DM is performed merely based Eqs: ð1Þ–ð13Þ ð20Þ
on the forecasted prices and risk is neglected; σ indicates a profit
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deviation index that is used to model the minimum desired profit by Solving the optimization problem stated in Eq. (20) leads to the
the retailer. In a risk-averse strategy, the objective of the IGDT robust strategy based on critical profit, J c . This means that the sol-
model is to maximize the uncertainty parameters (α and ζ) while ution ensures a minimum profit of J c provided that all absolute
the required performance is met relative forecast errors are less than μ̂, which is the maximized tol-
erable error. Obviously, if the market prices are increased, the
μ̂ðd; J c Þ ¼ maxðα or ζÞ cost of buying energy increases as well. If the production (self-
X T X E X
I generation plus bilateral contracts) is greater than the predicted
subject to Min ρðe; iÞDðe; i; tÞ − λðtÞPP ðtÞ load, and if the market price is high, the retailer is willing to sell
t¼1 e¼1 i¼1 its excess energy to the market (if there is a buyer). On the other
X
B X
G  hand, if the market price is low, the retailer is obliged to reduce its
− γðb; tÞPB ðb; tÞkðtÞ − πðgÞEG ðg; tÞ ≥ ð1 − σÞJ 0 production facilities to avoid losses.
b¼1 g¼1 As stated, Jðd; xÞ is the retailer’s objective function (profit).
~ ≤ λðtÞ ≤ ð1 þ αÞλðtÞ
ð1 − αÞλðtÞ ~ This variable is a function of the decision variables (d) and uncer-
tain parameters (x). So, J c (desired profit) is a controllable param-
~
ð1 − ζÞDðe; ~
i; tÞ ≤ Dðe; i; tÞ ≤ ð1 þ ζÞDðe; i; tÞ eter via σ [profit deviation index, Eq. (18)]. So, μ is the robust
Eqs: ð1Þ–ð13Þ ð19Þ objective function (variable) and μ (α or ζ) cannot be set to zero
or another value.
The risk level of the retailer’s planning can be controlled in this Opportunistic Strategy
model through a confidence level, J c ¼ ð1 − σÞJ 0 , which is deter- Electricity markets may experience unexpected price falls and de-
mined by the retailer according to its risk management policy. mand spikes. A risk-seeking retailer tends to take advantage of
There are various midterm strategies that the retailer can select ac- such desirable variations utilizing an opportunity function. Using
cording to its market situation, competitors’ status, and position. Eq. (17), the opportunity function can be written in mathematical
These strategies include the (1) costs strategy, (2) differentiation form as
strategy, and (3) focus strategy. In the cost strategy (or invasive
n o
strategy), retailers are looking to increase their market share and
β̂ðd; J w Þ ¼ min μ∶ max Jðd; xÞ ≥ J w ¼ ð1 þ τ ÞJ 0 ð21Þ
cost superiority over other competing companies. Important tools μ ~
x∈Uðμ;xÞ
in implementing this policy are the price reduction of energy sell-
ing, new and exciting products, and advertising and marketing in- where J w = target profit that the retailer expects to get, if there are
vestment, as well as increments in efficiency. In the differentiation price falls and demand spikes, which is a factor of the expected
strategy, the retailer offers unique services that will create added profit J 0 through τ . Target profit J w is usually greater than J c .
value for clients. In the focus strategy (defensive strategy), the The opportunity function can be stated using a similar formulation
retailer focuses on a small and narrow part of the retail market.
It offers differentiated services and makes added value for its clients β̂ðd; J c Þ ¼ minðα or ζÞ
in order to benefit from their loyalty and to provide services to X T XE X
I
them. Small companies often choose to take a defensive strategy
subject to Max ρðe; iÞDðe; i; tÞ − λðtÞPP ðtÞ
because of their limited competitive facilities and resources. This t¼1 e¼1 i¼1
is acceptable in the short term. With increasing competition, defen-
X
B X
G 
sive strategies cause clients to decrease in the future and the market − γðb; tÞPB ðb; tÞkðtÞ − πðgÞEG ðg; tÞ ≥ ð1 þ τ ÞJ 0
to shrink unless the retailer uses other competitive market advan- b¼1 g¼1
tages. So, the determining factor (σ) depends entirely on the retail-
~ ≤ λðtÞ ≤ ð1 þ αÞλðtÞ
ð1 − αÞλðtÞ ~
er’s risk management policy.
The pool price and demand are related to each other. But this ~
ð1 − ζÞDðe; ~
i; tÞ ≤ Dðe; i; tÞ ≤ ð1 þ ζÞDðe; i; tÞ
correlation must be modeled before formulation (in the forecasting
process). In IGDT, it is assumed that there is an initial forecast of Eqs: ð1Þ–ð13Þ ð22Þ
pool price and demand (without making assumptions about their
structure). By the given uncertainty μ, the maximum profit seems likely to
With the given uncertainty μ, the minimum profit in Eq. (19) take place for the lowest price and greatest demand permitted by the
seems likely to take place for the highest price and the lowest de- IGDT model at the horizon of the uncertainty μ that are equal to
mand at the horizon of uncertainty μ that is equal to ð1 þ αÞλðtÞ ~ ~ and ð1 þ ζÞDðe;
ð1 − αÞλðtÞ ~ i; tÞ, respectively. Thus, as illustrated
~
and ð1 − ζÞDðe; i; tÞ. Thus, the aforementioned problem can be ex- in Eq. (23), the opportunity model would be stated in a simplified
pressed in the form of the following equation: form as a single-objective optimization problem

© ASCE 04017030-5 J. Energy Eng.

J. Energy Eng., 2017, 143(5): -1--1

 Table 2. Computational Size of the Problem profit for the retailer. This procedure is also followed in converting
Items Number Eqs. (17)–(23) in which the price is lower than the forecasted value.
The above description is true in the case of the worst-case scenario
Binary variables EI þ B
for the load.
Real variables ðG þ B þ 1ÞT þ EI þ 2
Constraints 2B þ 2TðG þ 1Þ þ Eð2I þ 1Þ þ 2
The optimization solution algorithm can be found in detail in
Appendix II.

β̂ðd; J c Þ ¼ minðα or ζÞ Case Study

XT X E X I
subject to ~
ρðe; iÞð1 þ ζÞDðe; i; tÞ The proposed model has been implemented in a case study where
t¼1 e¼1 i¼1 contractual period was assumed to be 1 month. The opportunity
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X
B problems and robustness are considered as a mixed integer nonlin-
~
− ð1 − αÞλðtÞP P ðtÞ − γðb; tÞPB ðb; tÞkðtÞ ear programming (MINLP) problem. The MINLP optimization
b¼1 problem is then solved in GAMS software by a DICOPT solver.
X
G  The size of the problem is presented in Table 2 in terms of variables
− πðgÞEG ðg; tÞ ≥ ð1 þ τ ÞJ 0 and constraints.
g¼1

Eqs: ð1Þ–ð13Þ ð23Þ Data

Therefore, a higher profit of J w would be obtained provided that
the future price and demand desirably deviate from the forecasted
values by β̂, denoting the minimum needed desirable variations of
price that make J w obtainable.
Regarding Eq. (16) [also Eqs. (18) and (19)], the worst-case sce-
nario for the market price (and load) is considered. As mentioned
previously, to model the uncertainty of parameters, the envelope-
bound model is selected with the structure depicted in Fig. 2.
In this structure, the variable upper and lower bounds,
~
i.e., ð1 − αÞλðtÞ ~
and ð1 þ αÞλðtÞ, are considered for the price.
Based on this band, as much as the market price is low [e.g., the
forecasted value is higher than the real value (lower bound)], the
cost of purchasing electricity would be decreased and vice versa.
In the optimization problem, as the two boundaries can be inves-
tigated, therefore Eq. (16) [or Eq. (19)] is considered for the
worst-case situations in which the market price is higher than
the forecasted value (lower profit from the expected value). Thus,
the method is seeking the solution to be robust against the price
increasing. Converting Eqs. (19) and (20) shows that the higher
market price (higher than the forecasted value) can lead to a lower
MWh
A stepwise price-quota curve including 100 steps of the load pro-
vided by the retailer has been assumed [as done by Carrión et al.
(2007)], considering one type of costumer. Demand is divided into
three levels including peak (P), shoulder (S), and valley (V).
Twelve bilateral contracts are provided as the input of the simula-
tion. The best estimated load profiles of the retailer (MWh) and
price data ($=MWh) are presented in Fig. 3.
Robust Strategy
In this section three different robust strategies are tested against
(1) price uncertainty, (2) demand uncertainty, and (3) simultaneous
price and demand uncertainty.
Having taken into consideration the price data, the proposed
problem, i.e., the profit maximization problem, is simulated based
on Eq. (14). The value of the expected optimal profit, J 0 , is
$2,528,400. Afterward, Case 1 (ζ ¼ 0) of the optimization problem
Eq. (20) is solved considering different values for σ, resulting in
different critical profits J c . For instance, if σ ¼ 0.43, the value
of the critical profit would be ensured at J c ¼ $1,769,880, provided
that none of the deviations is greater than μ̂ ¼ 37%. This means
$/MWh

3050 60
Demand price

2850 50

2650 40

2450 30

2250 20

2050 10

1850 0
1 6 11 16 21 26 31 36 41 46 51 56 61 66 71 76 81
Period

Fig. 3. Predicted pool price and load profile

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 0.45 Robustness value, (d,Jc)

0.4

0.35

0.3

0.25

0.2

0.15
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0.1

0.05

0
1,517,040 1,643,460 1,769,880 1,896,300 2,022,720 2,149,140 2,275,560 2,401,980 2,503,116
Profit level, Jc($)

Fig. 4. Robustness curve (Case 1)

that if the actual prices are within this range, the profit obtained by
the retailer would be at least J c ¼ $1,769,880. In the risk-neutral
case (without any errors), the retailer should purchase 9.8% of its
electricity from bilateral contracts, 79.9% from the pool, and 10.3%
from self-generating in which σ ¼ 0. Also, the selling price offered
by the retailer to the clients should be $72/MWh. If the retailer
takes the risk-averse strategy, the results obtained from the simu-
lation of the robustness function will be helpful.
Fig. 4 demonstrates the results of the optimum robustness func-
tion values μ̂ versus profit level (J c ) derived from solving the
optimization problem Eq. (20) considering σ ¼ 0 − 0.6. Fig. 3
shows that σ ¼ 0 (J c ¼ $2,528,400) relates to the zero robustness
(μ̂ ¼ 0).
The robustness parameter starts to rise as σ increases, implying
that a higher deviation from the predicted price can be endured with
the cost of lower profit expectations. Deciding on high robustness
by the retailer leads to a low profit. Similarly, low profit of the
retailer demonstrates the state of being more risk averse and also
the high robustness of the strategy taken by the retailer. Purchasing
from the pool increases with increasing J c (Fig. 5). However, pur-
chase from the bilateral contracts and generation units is increased
with J c . These are such a logical result denoting that in the case of
choosing a more robust strategy by the retailer, it is desired to pur-
chase more electricity from the sources with no uncertainty in price.
To attract as much consumption as possible, the retailer offered a
lower selling price to the customers as the retailer is interested in
purchasing more from the pool (lower σ). The selling price in-
creases with a risk-averse strategy, because the percentage of the
retailer’s customers is lower. Consequently it is less profitable,
and the retailer is concerned solely with a safety margin.
In Case 2, demand deviation is only intended as the source of
uncertainty (α ¼ 0). Solving Eq. (20), the optimum decisions in
robust strategy are achieved in which σ is changed from 0 to
45%. As already defined, the value of ζ demonstrates the uncer-
tainty of the demand. Fig. 6 demonstrates the robustness function
values (μ̂) versus profit level (J c ) such that μ̂ reaches its maximum

90 Electricity procurement (%) Bilateral contracts Pool Self generation

80

70

60

50

40

30

20

10

0
1,517,040 1,643,460 1,769,880 1,896,300 2,022,720 2,149,140 2,275,560 2,401,980 2,503,116
Profit level, Jc($)

Fig. 5. Optimal procurement from different sources (Case 1)

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J. Energy Eng., 2017, 143(5): -1--1

 0.5
Robustness value, (d,Jc)
0.45

0.4

0.35

0.3

0.25

0.2
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0.15

0.1

0.05

0
2,528,400 2,401,980 2,275,560 2,149,140 2,022,720 1,896,300 1,769,880 1,643,460 1,517,040 1,390,620
Profit level, Jc($)

Fig. 6. Robustness curve (Case 2)

Table 3. Percent of Load Procurement Strategies (Case 2) Table 4 presents the solution for the load procurement strategy.
For Solution 6, the load procurement percentages are 60.0, 24.6,
σ Pool Bilateral contract Self-generation and 15.4% for the pool market, bilateral contracts, and self-
(%) μ̂ (%) (%) (%)
generation facility, respectively. In this strategy, the expected profit
0 0 86.4 3.9 9.7 would not be less than 0.8 of the maximum profit, if the price de-
45 0.464 74.6 7.2 18.2 viations are lower than 1.311 times the forecasted price and the
demand deviations are higher than 1.05 times the forecasted
demand.
value, μ̂ ¼ 0.464, in σ ¼ 0.45. Optimal procurement from different
sources is presented in Table 3.
In Case 3, the simultaneous price and demand deviation are con- Opportunistic Strategy
sidered as the sources of uncertainty. First, it is supposed that the To evaluate the profit gained under the opportunity function, in this
retailer chooses σ ¼ 0.2 (J c ¼ $2,022,720), and Eq. (20) is solved section three different strategies are examined, as follows:
for the values of σ in which the maximum value of α is achieved at • Case 4: opportunistic strategy against price uncertainty;
0.234 (ζ ¼ 0). The problem is solved as a multiobjective problem • Case 5: opportunistic strategy against demand uncertainty; and
to generate Pareto-optimal solutions as shown in Fig. 7. Taking into • Case 6: opportunistic strategy considering simultaneous de-
account the particular preference of the application, the most- mand and price uncertainties.
desired and satisfying solution is picked out by utilizing different In Case 4, the value of τ in Eq. (23) varies from 0 to 0.2 to
methodologies such as a fuzzy decision maker or analytic hierarchy discuss the profit gain considering an opportunity function. Fig. 8
process (AHP) method after the Pareto-optimal solutions are ex- depicts the opportunity function values (β̂) versus the target profits
tracted by solving the optimization problem. (J w ). More price deviations from the predicted values are needed

values
0.25

0.2

0.15

0.1

0.05

0
0 0.01 0.02 0.03 0.04 0.05 0.06 0.08 0.1 0.12 0.14 0.16 0.18 0.2
values

Fig. 7. Pareto front of robustness strategy for σ ¼ 0.2 (Case 3)

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J. Energy Eng., 2017, 143(5): -1--1

 Table 4. Percent of Load Procurement Strategies to have a higher desired target profit. For instance, to get a profit,
Bilateral 20% more than J 0 (J w ¼ $3,034,080) the prices have to be at least
Solution Pool contract Self-generation 12.9% lower than the forecasted prices. Also, the selling price to
number ζ α (%) (%) (%) the clients by the retailer, ρðeÞ would be $61/MWh.
1 0 0.234 61.0 23.4 15.6
The increase in the profit can be interpreted as an increase in the
2 0.01 0.225 60.6 23.6 15.7 risk. The percentage of purchase from the pool will increase while
3 0.02 0.216 60.5 23.9 15.7 J w is changed by the other options. In fact, choosing a low-cost
4 0.03 0.206 60.1 24.1 15.8 strategy means accepting a higher risk, and so a higher portion
5 0.04 0.196 60.2 24.4 15.5 of load procurements from the sources with uncertain prices. Also,
6 0.05 0.186 60.0 24.6 15.4 to attract more customers, the selling price to the customers de-
7 0.06 0.175 59.7 24.9 15.4 creases (Fig. 9). Fig. 9 shows that the selling price to the customer
8 0.08 0.152 59.1 25.4 15.4 decreases with the risk-taking strategy, because the percentage of the
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9 0.1 0.129 63.2 21.8 15.0 retailer’s customers is high and consequently it is more profitable.
10 0.12 0.107 69.1 16.2 14.8
In Case 5, the purpose of the retailer is to select an opportunity
11 0.14 0.084 70.4 15.3 14.3
12 0.16 0.06 70.4 15.6 13.9 approach against the demand uncertainty (with α ¼ 0). Solving
13 0.18 0.034 70.4 16.0 13.6 Eq. (23) for different values of τ (changed from 0 to 45%), the
14 0.2 0.008 74.9 12.3 12.9 optimum decisions in opportunistic strategy are achieved for each
Jw . The optimum opportunity function values β̂ versus profit level

0.16 Opportunity value, (d,Jw)

0.14

0.12

0.10

0.08

0.06

0.04

0.02

0.00
2,528,400 2,578,968 2,629,536 2,680,104 2,730,672 2,755,956 2,781,240 2,831,808 2,907,660 3,034,080
Profit level, Jw($)

Fig. 8. Opportunity function (Case 4)

74 ($/MWh)
72
70
68
66
64
62
60
58
56
54
2,528,400 2,578,968 2,629,536 2,680,104 2,730,672 2,755,956 2,781,240 2,831,808 2,907,660 3,034,080
Profit level, Jw($)

Fig. 9. Selling price to customers (Case 4)

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 0.5 Opportunity value, (d,Jw)
0.45

0.4

0.35

0.3

0.25

0.2
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0.15

0.1

0.05

0
2,528,400 2,654,820 2,781,240 2,907,660 3,034,080 3,160,500 3,286,920 3,413,340 3,539,760 3,666,180
Profit level, Jw($)

Fig. 10. Opportunity function (Case 5)

(J w ) are found and presented in Fig. 10. The value of β̂ begins from
0 in τ ¼ 0 and reaches its maximum value, β̂ ¼ 0.464 in τ ¼ 0.45.
Optimal procurement from different sources is presented in Table 5.
In Case 6, the purpose of the retailer is to select an opportunity
strategy against the simultaneous price and demand uncertainty
for a target profit (J w ). First, if the retailer select the τ ¼ 0.15
(J w ¼ $2,907,660), then Eq. (23) can be solved for the given value
of τ and it will try to find the minimum value of α. For this case,
α ¼ 0.118 (with ζ ¼ 0), so the problem is solved as a multiobjec-
tive problem. The Pareto-optimal front is shown in Fig. 11. Also,
Fig. 12 shows the selling prices to the customers (τ ¼ 0.15).
Discussion
IGDT methods have practical advantages over other methods (such
as scenario-based methods and fuzzy logic–based models). In the
case of risk-based planning of the retailer, an IGDT-based model
determines optimal schedules in order to achieve a target profit,
whereas scenario-based methods find optimal schedules based
on a limited number of possible price (and load) scenarios. In
addition, unlike scenario-based models, IGDT-based methods
guarantee a predefined level of profit. The different scenario gen-
eration methods can result in different solutions, especially in the
stochastic methods. Also, in scenario generation methods, the un-
certain parameter should have a probability density function or a
specific membership function. In contrast, in the proposed method,
there is no assumption regarding the above issues. Therefore, the
results of these two methods are not comparable. Accordingly,
based on the obtained results, it can be discussed as follows:
• In the proposed strategy, the decision remains immune to a mini-
mum critical profit attributable to future price spikes (Case 1)
and demand falls (Case 2) within a maximized robustness
region. For a risk-seeking retailer, the proposed opportunistic
formulation enables the retailer to benefit from unpredictable
price falls (Case 4) and demand spikes (Case 5).
• The results demonstrate that in the robust strategy (related to a
lower profit), purchases from sources with an uncertain price
(pool market) are decreased. Furthermore, the selling price
is decreased to attract more clients, because the percentage
of a retailer’s customers is high and consequently it is more
profitable. Unlike the robust strategy, in the risk-seeking strat-
egy, purchases from sources with uncertain prices is increased,
which provides opportunities for windfall benefits. Further-
more, the selling price is increased.
• The results show that in Case 2 (robust strategy with demand
fall), with more deviation in the demand, purchases from the
pool market are decreased (i.e., a 45% decrease in load results
in a 15.8% decrease in pool purchases with 46.4% robustness).
Also, in the opportunistic strategy related to Case 5, with in-
creasing demand, the purchase from the pool market is in-
creased (i.e., a 45% increase in load results in a 4.7%
increase in pool purchases with 46.4% opportunity).
0.14 values
0.12
0.1
0.08
0.06
0.04
0.02

Table 5. Percent of Load Procurement Strategies (Case 5) 0

0 0.02 0.04 0.06 0.08 0.1 0.12 0.14 0.16
τ Pool Bilateral contract Self-generation values
(%) β̂ (%) (%) (%)
0 0 86.4 3.9 9.7 Fig. 11. Pareto optimal front of opportunity with price and demand
45 0.464 90.7 2.6 6.7 uncertainty for τ ¼ 0.15 (Case 6)

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J. Energy Eng., 2017, 143(5): -1--1

 ($/MWh)
74 α=0.045 α=0.012

72 α=0.062

α =0.028 α=0
70

68

66

64 α=0.091
α=0.118
α=0.079
62
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60

58

56
0 0.02 0.04 0.06 0.08 0.1 0.12 0.14 0.16
values

Fig. 12. Selling price to customers (Case 6)

Conclusion and Future Work
This paper proposed an IGDT-based strategy for the retailer con-
sidering uncertain demand and future electricity market prices.
Considering a self-generating unit, bilateral contracts, and market
pool as the purchase sources, the proposed technique helps the
retailer to recognize its purchase and selling-price strategy while
evaluating its robustness against the high pool price and low de-
mand (low-profit situation). The effectiveness of the proposed
framework has been tested in realistic examples.
Also, the proposed model considers the uncertainty of pool pri-
ces and demand. However, examining the effects of a renewable
portfolio (Zhou and Liu 2014), the bilateral contract price and
the capacity of the bilateral contract are also subject to uncertainty.
The proposed formulation can be enhanced if call options and in-
terruptible contracts are available for the retailer. Also, in future
work, based on the IGDT concept, other pricing schemes (such
as time-of-use pricing) can be considered. The load modeling issue
is an important challenge that should be considered in the time-of-
use pricing. If the selling price is too high, the clients could maybe
shift their loads or choose another rival retailer, for which the
chosen strategy is completely different.
equality and inequality constraints, respectively. fðX; dÞ describes
the relations between the decision variables (d) and input uncertain
parameters (X). In the case of the uncertain input parameters, X
values are equal to their predicted values (X ¼ X̄). Then solving
Eq. (24) gives the predicted value of y ¼ ȳ. However, if the value
of X is unknown, then the IGDT method tries to find a solution for
the problem that is robust against the error in predicting the value of
X. In the IGDT, the robustness is defined as the immunity of sat-
isfaction of a predefined constraint. The robustness of a decision d
based on the requirement lc , α̂ðd; lc Þ, is defined as the maximum
value of α at which the decision maker is sure that the required
constraints are always satisfied, as follows (Soroudi and Amraee
2013a; Aien et al. 2016):
max α̂ðd; lc Þ
∀ X ∈ Uðα; X̄Þ
fðX; dÞ ≤ lc
lc ¼ ð1 þ ζÞ × ȳ
HðX; dÞ ¼ 0
GðX; dÞ ≥ 0 ð25Þ

Appendix I. Comparison among IGDT, RO, where ζ = degree that the decision maker tolerates the deterioration
and Min-Max Regret Optimization of the objective function because of the forecasting error of the
input parameter X.
There are similarities and differences among the IGDT technique,
robust optimization, and min-max regret optimization in determining
Robust Optimization Formulation
the decision maker’s strategy. The general formulations of these three
models have been presented for comparison purposes as follows: Consider a function like z ¼ fðX; yÞ, which is linear in X and non-
linear in y. The values of X are subject to the uncertainty while the
IGDT Formulation values of y are known. The uncertainty of X is modeled with an
uncertainty set X ∈ UðXÞ, where UðXÞ is a set that parameter X
Consider a typical optimization function as follows: can take value from it. The maximization of z ¼ fðX; yÞ can be
formulated via the following formulation:
y ¼ minfðX; dÞ
HðX; dÞ ¼ 0 max z ¼ fðX; yÞ
GðX; dÞ ≥ 0 ð24Þ X ∈ UðXÞ ð26Þ

where X = vector of input parameters (which are subject to severe Since the value of z is linear with respect to X, it can be refor-
uncertainty) and d = vector of decision variables. H and G are the mulated as follows:

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 max z T X
X E X
I
profit ¼ ρðe; iÞD̄ðe; i; tÞ − λðtÞPP ðtÞ
~ yÞ
z ≤ fðX; t¼1 e¼1 i¼1
~ yÞ ¼ AðyÞ × X~ þ gðyÞ X
B X
G 
fðX;
⌢
− γðb; tÞPB ðb; tÞkðtÞ − πðgÞEG ðg; tÞ ð30Þ
X~ ∈ UðXÞ ¼ fXjjX − X̄j ≤ X g ð27Þ b¼1 g¼1

⌢ For the sake of simplicity, the above equation can be stated as

~ X̄; X = uncertain value, predicted value, and maximum
where X;
possible deviation of variable X from X̄, respectively. The robust P½λðtÞ; Dðe; i; tÞ ¼ max fI½ρðe; iÞ; Dðe; i; tÞ − C½λðtÞ; Xg
optimization seeks a solution that not only maximizes the objective ρðe;iÞ;X

function z but also assures the decision maker that if there exist ð31Þ
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some prediction errors about the values of X, the z remains opti-

mum with high probability. The robust counterpart is defined as In which P, I, and C = profit, income, and cost, respectively.
follows: Also, X is the vector of decision variables.
For a given decision the regret, Reg½ρðe; iÞ; X of a retailer is
max z defined as
~ yÞ
z ≤ fðX; Reg½ρðe; iÞ; X∶ ¼ P½λðtÞ; Dðe; i; tÞ
X ⌢
fðX; yÞ ¼ AðyÞ × X̄ þ gðyÞ − max ai ðyÞ × X i × wi − fI½ρðe; iÞ; Dðe; i; tÞ − C½λðtÞ; Xg ð32Þ
i
X
wi ≤ Γ In the above definition, the maximum total profit is evaluated
i by Eq. (31) under perfect information (i.e., the profit obtained
0 ≤ wi ≤ 1 ð28Þ if the retailer had known the electricity price and demand before
making any decision). On the other hand, I½ðe; iÞ; Dðe; I; tÞ −
C½λðtÞ; X represents the total profit corresponding to the decision
Γ = degree of conservativeness and y = set of decision variables. ½ρðe; iÞ; X under the realized electricity price and demand.
Based on Eq. (28), two nested optimization problems are to be Reg½ρðe; iÞ; X measures the loss of profit attributable to imperfect
solved. Inserting a dual form of Eq. (28) information of the uncertain parameters. Under the min-max regret
criterion, the objective function is to minimize the largest regret
value Reg½ρðe; iÞ; X over all possible scenarios as follows:
max z
~ yÞ
z ≤ fðX; min max Reg½ρðe; iÞ; X ð33Þ
½ρðe;iÞ;X λ;D
X
fðX; yÞ ¼ AðyÞ × X̄ þ gðyÞ − Γβ − ξi
i
⌢
β þ ξ i ≥ Aðyi Þ × X i ð29Þ Appendix II. ε-Constraint Method

A multiobjective problem simultaneously maximizes a number of

objective functions over a set of feasible solutions, Ω (Aghaei et al.
Min-Max Regret Optimization
2011)
Even though the robust optimization approach has been widely
used in power system operations and other fields, it is often con- maxfðxÞ ¼ ½f 1 ðxÞ; : : : ; fm ðxÞT ð34Þ
sidered to be overconservative, e.g., achieving robustness with a
significant profit reduction. In the min-max regret approach, the such that
uncertain parameter describes using the confidence intervals as that
described in the robust optimization approach, and aims to mini- x∈Ω
mize the maximum regret (Savage 1951; Aissi et al. 2009). By ap- Gk ðxÞ ¼ 0
plying the min-max regret approach, the objective is to obtain a
solution that minimizes the worst-case regret over all possible sce- k ¼ 1; : : : ; K
narios while ensuring system robustness. That is, for the same given Hz ðxÞ ≤ 0
risk level (e.g., for the same given price uncertainty set), by using
the min-max regret approach, a risk-averse market participant will z ¼ 1; : : : ; Z ð35Þ
get the minimum regret as compared to the robust and stochastic
optimization approaches under the worst-case scenario. Mean- where x = set of controllable quantities; fðxÞ = vector of the ob-
while, the min-max regret approach can provide computationally jective functions; and Gk ðxÞ and Hz ðxÞ = constraints.
less conservative objective value, i.e., larger expected profit, In this field, the optimality concept is replaced with the Pareto
than the worst-case robust optimization approach for the same optimality. With Pareto-optimal solutions (nondominated or nonin-
given uncertainty set (Aissi et al. 2009). Therefore, the min-max ferior) it is not possible to increase the performance of one objective
regret approach is less conservative than the robust optimiza- function without influencing negatively certain others. In this pa-
tion approach and more robust than the stochastic optimization per, noninferior solutions are calculated by using the ε-constraint
approach. method (Aghaei et al. 2011), in which one objective function (m) is
As mentioned in the text, the retailer’s profit can be abstracted as selected and the others become new constraints. Accordingly, the
follows: formulation becomes as follows:

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 maxfm ðxÞ ð36Þ α= horizon of the uncertain pool price;
such that γðb; tÞ = energy price of contract b at time t ($=MWh);
λðtÞ = pool price at time t ($=MWh);
fw ðxÞ ≥ εw ~ =
λðtÞ estimated pool price at time t ($=MWh);
w ¼ 1; : : : ; M μ= horizon of the uncertain variable;
and πðgÞ = cost associated with block g of the self-generating
facility ($=MWh);
w≠m ð37Þ ρðeÞ = selling price to client group e ($=MWh);
with the previous constraints (36)–(38). ρðe; iÞ = price of the i interval of the price-quota curve for client
Moreover group e ($=MWh);
ρ̄ðe; iÞ = upper limit of the price in block i of the price-quota
εw ¼ εw − Δεw
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ð38Þ curve pertaining to the client group e ($=MWh); and

where εw = lower limit of fw ðxÞ; εw = global noninferior value of
f w ðxÞ; and Δεw = trade-off presence of the decision maker.
A payoff table can finally be introduced, representing the results
from the individual optimization of each objective function.
Notation
The following symbols are used in this paper:
B = number of bilateral contracts;
b = set of bilateral contracts;
CB = bilateral contracts cost ($);
CG = energy operation cost of the generating unit ($);
CP = net cost of trading in the pool ($);
Dðe; tÞ = energy supplied by the retailer to client group e in
period t (MWh);
D̄ðe; i; tÞ = estimation of the energy associated with block i of the
price-quota curve of client group e in period t (MWh);
E = number of client groups;
EG ðg; tÞ = energy pertaining to block g of the self-generating
facility at time t (MWh);
Emax
G ðgÞ = size of production block g (MWh);
e = set of client groups;
G = number of production blocks of the generating facility;
g = set of the generating blocks of the self-generating
facility;
I = number of blocks in the price-quota curves;
i = set of blocks in the price-quota curves;
J 0 = expected maximum profit based on the forecasted
prices ($);
J c = critical profit ($);
J w = target profit ($);
Jðd; xÞ = retailer’s profit function ($);
kðtÞ = duration of period t;
PB ðb; tÞ = procured power from bilateral contract b at time t
(MW);
PP ðtÞ = purchased energy from the pool at period t (MWh);
B ðbÞ = maximum power pertaining to contract b (MW);
Pmax
B ðbÞ = minimum power pertaining to contract b (MW);
Pmin
Rðe; tÞ = revenue obtained from selling to client group e in
period t ($);
T = number of time periods;
t = set of hours;
x = uncertain parameter;
Yðe; iÞ = binary variable, which is equal to 1 if the selling price
offered by the retailer to client group e belongs to block
i of the price-quota curve, and 0 otherwise;
ZðbÞ = binary variable, which is equal to 1 if bilateral contract
b is selected, and 0 otherwise;
ζ= horizon of the uncertain electricity demand.
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