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Game theory and competitive aspects in electricity markets

Conference Paper · June 2017

DOI: 10.1109/EEEIC.2017.7977703

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 Game Theory and Competitive Aspects
in Electricity Markets
George Cristian Lazaroiu, Virgil Dumbrava, Mihnea
Costoiu
University POLITEHNICA of Bucharest
Bucharest, Romania
Abstract— The liberalization of electricity markets in Europe
was a highly-debated topic in the last thirty years. Almost three
decades after the start of the deregulation processes,
performances obtained by the introduction of competition in the
electricity markets are still difficult to be perceived by final
consumers. Until now, the assumption that the deregulated
electricity markets naturally generate lower prices for consumers
and economic efficiency has not been verified yet. In a
deregulated electricity marketplace, participants are more
interested in maximizing their own profits rather than
contributing the system-wide benefits. Moreover, the particular
features of the electricity industry determine electricity market
participants to be more aggressive in their bidding strategies.
Therefore, studying the bidding strategies of the electricity
market participants becomes an important issue. In this paper,
the bidding strategies for three classical power producers are
analyzed for different level of power system demand in single-
auction market.
Keywords—game theory; electricity markets; strategies; Nash
equilibrium
I. INTRODUCTION
In the competitive markets, there is a strong correlation
between market participants’ behavior and their profits. The
profit of one participant depends also on the behavior of the
other participants in the decision-making process. A decision-
maker should take into consideration the strategies that have
been (or will be) chosen by his competitors [1, 2].
On the Romanian wholesale electricity market, the
transactions are carried on by electrical energy producers and
suppliers (double-sided auctions), and system operators [3].
The trading in the wholesale electricity market consist in
purchasing or selling electrical energy, transport services,
green certificates, and ancillary services. All these transactions
are carried on in a transparent and competitive way on the
commercial operator transaction platforms. On the Romanian
electricity market, the electrical energy is acquired by
suppliers from producers or other suppliers, for system
operators to balance energy consumption and for further
selling or for their own use. The most developed platform,
with the highest number of participants, is the spot market
platform. The sell and purchase bids of the voluntary
participants at spot market are collected by the market
operator. Afterwards, the aggregated hourly sell and purchase
978-1-5386-3917-7/17/$31.00 ©2017 IEEE
Mariacristina Roscia
Universita di Bergamo
Bergamo, Italy
curves are built to determine hourly market clearing prices, as
well as the supply and demand schedules. The market clearing
price is used by all sellers and buyers with accepted supply,
respectively purchase, bids.
This paper deals with game theory applied to analyze the
electrical energy trades on the spot market. The producers
participating in the electricity market maximizes their benefits
through choosing the best strategies to compete. The strategies
can be Quantity and Price, maximizing their benefits through
optimal offering quantity and optimal bidding price.
II. PROBLEM FORMULATION
The game theory is applied for analyzing the optimal
bidding in a spot market where the participants (in particular
selling entities) seek to obtain the maximum benefit [4-8].
Three elements define the game [9]:
• the set I={1, 2,..i} of players, with each player i ∈I,
represented by each generating entity;
• for each player I, there is a set that contains possible
scenarios Si, and si is an arbitrary strategy within the set
Si. A strategy of a player is an ensemble of rules
defining in a unique manner the free permutations,
function of the occurring situation during the game. For
the analyzed problem, the possible strategies of each
player are represented by offered quantity and bidding
price;
• the payoff functions ui(Si) represented by the benefits of
each player.
A pure strategy for the player i is an achievable action that
can be chosen by the player from space Si, si ∈Si, and which
would bring to this player the payoff ui(s). Actions chosen by
other players are defined s=(si,s-i), with s-i=(s1,...,si-1, si+1,...,sI).
As the producers seek to maximize their benefits, in order
to have a Nash equilibrium, the market operator sets maximum
and minimum limits for the bidding prices, otherwise each
producer would bid an unlimited price with respect to the other
producers’ strategies [10]. In a game G defined as
G={S1,...Si;u1,...,ui}, the strategies (sj*,...., si*) constitute a Nash
equilibrium if for each player j, sj* is the best response of player
j to the strategies of I-1 other players [9], i.e.
 ( ) (
u j s1* ,.., s *j ,.., si* ≥ u j s1* ,.., s j ,.., s *j
or sj* will be the solution of the problem:
(
max u j s1* ,.., s j ,.., s *j
s j ∈S j
As type of game behavior, there can be cooperative games,
in which the players communicate among themselves before
making decisions, and non-cooperative games in which the
players do not communicate among themselves before making
decisions [9].
A non-cooperative game applied to the electricity market is
game involving n participants with their conflicting interests,
whose possible actions are known by all players. Thus, there is
a game with perfect information.
In this study is taken into consideration a static non-
cooperative game. In this article generation companies are
treated as players that are trying to maximize the profit of their
company using different strategies. The offered quantity and
bidding price are considered independent one from each other
[11-13].
Within this paper, several assumptions are made:
• the sum of total selling bids Pioffer is at least equal with
the system demand D;
• the demand is constant on each hourly trading of the 24
hours ahead market;
) ∀s j ∈ S j
C (Pi ) = a i + bi ⋅ Pi + ci ⋅ Pi 2 (4)
)
The scheduled power Pisched of each unit is equal with the
offered quantity Pioffer only if its bidding price is smaller than
the other prices in the merit order (arranging all the bidding
offers in an increase order function of bidding price).
If the unit i is becoming the last dispatched unit and thus
setting the market clearing price, then its scheduled power is
the difference between the total demand D and the sum of all
scheduled powers of the units wining the auction.
If the bidding price of unit i is higher than the market
clearing price, than this unit does not sell anything. In a real
competitive electricity market, the generation cost is treated as
confidential.
III. CASE STUDIES
The case study deals with economic dispatch of a day-
ahead market simulation. In the presented case study, 3
demand levels were considered (respectively 100, 200,
300 MW) in an electricity market where the generators can
adopt 3 different strategies.
The strategies of each participant regarding bidding price
are reported in Table I. The analyzed case study is shown in
Fig. 1.

• the offer bid of each producer is lower than the total TABLE I. BIDDING PRICE STRATEGIES
demand.
Strategies Prices
The benefit to be maximized of each selling entity is given Low 0.7 of the marginal cost of the unit
by: Base marginal cost of the unit
High 1.3 of the marginal cost of the unit
I
[MAX ] Bt =  (λ
i =1
t ( ))
⋅ Pi sched ⋅ 1 − C Pi sched , ∀t = 1,.., 24 (1)

where λi is the market clearing price, Pisched is the scheduled

power of generator i for each hour of the spot market trading,
1 represents the time horizon, and C(Pisched) is the production
cost function of Pisched of generating entity i.
subject to:
- balance equation at each bus of the analysed system
I

P
i =1
i,n − Dn =  PF
n
n
(2)

where Dn is the total demand at each bus n of the analyzed

system, and PFn is the power flow at bus n.
- capacity limit for each generating unit.

0 ≤ Pi ≤ Pi , max (3) Fig. 1. Analyzed network for competitive market competition.

Pi, max is the maximum power production of unit i. For each demand level, the simulations were carried on
using Matlab codes. The obtained results are reported trough
The generation fuel costs of each unit i are represented as Table II to Table IV.
quadratic functions:

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