IEEE TRANSACTIONS ON POWER SYSTEMS, VOL. 16, NO.
4, NOVEMBER 2001
Strategic Bidding for Minimum Power Output in the
Competitive Power Market
G. B. Shrestha, Senior Member, IEEE, Song Kai, Student Member, IEEE, and L. Goel, Senior Member, IEEE
Abstract—As deregulation of power industry is becoming a re-
ality, there has been an intense interest in the strategic bidding
for suppliers to optimize their benefits. The benefit gained by a
supplier is related not only to its energy-price bid curve but also
to its submitted operational parameters such as minimum output,
etc. This is especially so when market size is limited because of a
limited number of competitors in the market itself or due to the
transmission capacity constraints. This paper addresses the study
of strategic bidding for minimum output in a deregulated environ-
ment. The impact of minimum output bids on the market result
is analyzed. A criterion with regard to minimum output bid to as-
sess the outcome of competition among suppliers is derived. The
method to optimize the benefit from a supplier’s viewpoint by ad-
justing the bids for the minimum output and price is proposed. It
is shown that an individual supplier can optimize its own benefit
by fine-tuning its minimum output and price when there are only
a few suppliers dominating the market. A fairly thorough theoret-
ical analysis of the bidding for minimum output is illustrated with
a numerical example.
Index Terms—Minimum output, power market, strategic
bidding.
I. INTRODUCTION
W ITH the restructuring of power industry around the
world, power markets have been set up in many coun-
tries [1]. Power pool has emerged as a popular form of power
market where the participants, the suppliers and the customers
submit their bids and the system operation is managed by an
Independent System Operator (ISO). Each market participant
bids with the purpose of optimizing its own benefit. It is
obvious that the benefit gained by a supplier is directly related
to its submitted energy-price curve. The effect of some other
operational parameters on a supplier’s benefit can not be
ignored under certain environments. Many studies on strategic
bidding with energy-price curve have been carried out [2], [3],
[10], [4]. In [5], it is pointed out that it is possible for a supplier
to manipulate the system marginal price in certain cases by
fine-tuning a bid for flexible generation with lower minimum
output and higher price.
In a perfectly competitive market, a very large number of
small buyers and sellers trade independently, and as such no one
trader can significantly influence the price, i.e., no participant
holds significant market power in a perfectly competitive market
in equilibrium. However, a certain degree of market power al-
ways exists in reality. In general, market power is the ability
of a single seller or a group of sellers to influence the price of
Manuscript received November 10, 1999; revised June 12, 2001.
The authors are with Nanyang Technological University, Singapore.
Publisher Item Identifier S 0885-8950(01)09438-X.
0885–8950/01$10.00 © 2001 IEEE
813
product or service in which it is trading. In some power markets,
the number of the power suppliers is not large enough such as
in the Singapore power market, or there are a few major sup-
pliers with a significant market share such as in the UK. In ad-
dition, the size of the market available to the market participants
can be greatly reduced when there is transmission congestion. In
these cases, the market participants have opportunities to exer-
cise market power. Intense interest in the study of market power
issues has been observed in the power market since the deregu-
lation of the power industry [6], [7], [11], [8], [12].
Because of the minimum output constraints, sometimes the
suppliers with lower price have to be curtailed to satisfy the min-
imum output constraints of other committed suppliers. Thus the
benefits of the suppliers may be affected by the minimum output
constraints of other committed suppliers. Therefore, in certain
cases the suppliers will have an opportunity to optimize their
benefits by fine-tuning the minimum output and price. Con-
trary to the traditional regulated power industry where power
suppliers must submit their physical cost curves and the actual
values of the operational parameters, in a deregulated environ-
ment, not only can the power suppliers submit their energy-price
curves which need not necessarily be their actual cost curves,
but also they can submit other operational parameters, such as
minimum and maximum output, ramp rate, etc., which need not
necessarily be the actual values of the physical facilities.
This paper presents a study on strategic bidding using the op-
erational parameter, minimum output, submitted by power sup-
pliers in a deregulated environment. To the authors’ knowledge,
there have been no reported studies on the strategic bidding to
optimize a supplier’s benefit by providing appropriate bid with
regard to minimum output. The effects of the minimum output
constraint on the competitive market operation are analyzed in
detail. An approach to strategic bidding with respect to min-
imum output to optimize a supplier’s benefit is proposed.
This paper is organized as follows. Section II presents and ex-
plains the features of the deregulated environment. Section III
analyzes the effect of minimum output bids on the competi-
tive market operation. Section IV proposes the optimal strategic
bidding, followed by a numerical example in Section V. Ex-
tended analysis for a more comprehensive case is carried out
in Section VI. Section VII presents the conclusions.
II. FEATURES OF THE POWER MARKET ENVIRONMENT
The power market operating practices vary widely among dif-
ferent systems. The authors presented a power pool simulation
system [9] capable of handling wide range of bid data that re-
flect various levels of competition. These features are adopted,
814 IEEE TRANSACTIONS ON POWER SYSTEMS, VOL. 16, NO. 4, NOVEMBER 2001

power output of the other committed suppliers has to be reduced

by or .
2) ,
: This means that only the committed power with price
is reduced when accepting or .
Fig. 1. Bidding curve for a supplier. Then the cost when committing Supplier 1 is

(1)

The cost when committing Supplier 2 is

(2)

Supplier 1 will be committed over Supplier 2 if

which gives

(3)
Fig. 2. Competition between two marginal suppliers. Denoting

with some simplifications, in this paper to study strategic bid-
ding with respect to minimum output.
Each supplier bids to the power pool to sell the energy. The
bidding information includes energy-price curve in the form of
three-stage staircase linear function and other operational pa-
rameters, such as willingness to commit, different minimum
output and maximum output for every hour, etc. It is assumed
that the start-up cost, no-load cost and operational cost are all
included in the bidding curve of a supplier. The bidding curve
for a supplier is illustrated in Fig. 1.
The load requirements are assumed to be known through
load forecasting, demand side bidding is not considered and
ramp rate constraints are ignored. The market takes a day
ahead trading. The dispatch orders and prices are determined
for every hour independently with the objective function to
minimize the power supply cost while satisfying the balance of
supply and demand, line capacity limits, reserve requirements
and minimum output and maximum output for suppliers.
The clearing price for every hour is the highest price of the
committed suppliers. Details of the market features are given
in [9].
and (4)
Expression (3) can be written as
(5)
The left part of (5) is shown as the rectangle with vertical
strips (Area 1) in Fig. 2, and the right part is shown as the rec-
tangle with horizontal strips (Area 2). Thus the criterion for the
selection of Supplier 1 and Supplier 2 is:
When Area 1 is less than Area 2, Supplier 1 will be com-
mitted. And when Area 1 is greater than Area 2, Supplier 2 will
be committed.
This analysis is extended further to study strategic bidding of
minimum output. Expression (3) can be written as
(say) (6)
Suppose that Supplier 2 has fixed bids and and
is estimated constant, then is constant and Supplier 1 will be
committed if
(7)

III. EFFECT OF MINIMUM OUTPUTS ON THE MARKET Thus it is possible for Supplier 1 to adjust and to
A situation where the minimum output constraints affect the ensure that it gets committed. How to specify and is the
market clearing is shown in Fig. 2. Let be the load demand strategic decision for Supplier 1. The – curve is shown
at this hour and be the total committed capacities selected in Fig. 3.
in order of increasing price with the highest price . Supplier 1 will be committed when and lie to the
is the additional capacity required to satisfy the load. Let the left of the curve. It seems that the price of Supplier 1 ( ) can
next two suppliers have minimum outputs of and , be infinitely high provided its minimum output ( ) is small
both of which are larger than . So, some of the com- enough, or its minimum output ( ) can be infinitely large
mitted capacity has to be reduced to accommodate or so long as is small enough, in order for Supplier 1 to
. Let be the maximum possible reduction without be committed. However, there are practical limitations.
affecting the price . It was assumed earlier that . In addition, it
Supplier 1 has smaller minimum output but higher is obvious that . Thus we get
price of . Supplier 2 has larger minimum output but
(8)
lower price of . In the following analysis, some conditions
are assumed initially: It was also assumed that , and so
1) , : Under this con-
dition, when either Supplier 1 or Supplier 2 is committed, the (9)
SHRESTHA et al.: STRATEGIC BIDDING FOR MINIMUM POWER OUTPUT IN THE COMPETITIVE POWER MARKET 815

When is strictly between its limits (12), by associating

Lagrangian multiplier to (7) when it is satisfied as an equality
and adding it to (16), the Lagrangian function is

(17)

From Karush–Khun–Tucker (K–K–T) first order optimal

condition, we get

(18)
Fig. 3. MO ) and price (P ).
Feasible range of minimum output (

The case in which this condition is violated will be discussed (19)

in Section VI.
Corresponding to , the maximum price for Supplier (20)
1 can be obtained from (7):
As , from (18) we get
(10)
(21)
Since , thus
Then from (19), we get
(11)
(22)
Equations (8)–(11) give the limits on and
Then we get
(12)
(23)
(13)
Since the objective function (16) is quadratic and it is sub-
When Supplier 1 submits its minimum output and price sub- jected to the constraints of (12) and (13), we obtain the optimal
ject to the constraints of (8)–(13) or within the shaded area in value of , in terms of the following three cases.
Fig. 3, it always succeeds in competition with Supplier 2. We
when
will call this the strategic area for Supplier 1. It may be noted
when
that when equals , the supplier with the lower price
when .
between Supplier 1 and Supplier 2 will be committed. (24)
After obtaining , we get the optimal value of , .
IV. OPTIMAL STRATEGIC BIDDING
The analysis of the previous section is extended to derive the (25)
strategic bidding to determine the bids for minimum output and
price to optimize the supplier’s benefit from the viewpoint of Therefore, when , Supplier 1 has the possi-
Supplier 1. Suppose the cost function of Supplier 1 is bility to enhance its benefit so long as .
It is noted that the above analysis is based on the assumed con-
(14) ditions and . For Supplier 2,
when , its committed cost is ,
where , and are constants. which is a much simpler expression than (2). In this case, the
The objective of Supplier 1’s bid is to optimize its own ben- analysis can be carried out in the similar way as above but
efit. Therefore, for a bid of , we get the objective function will be simpler than the above analysis, which will not be de-
of the optimal problem as follows. scribed in the paper. For Supplier 1, when ,
its committed cost is . The result in this
(15) case is the same as the above result when . As
implies , the situation
or alternatively that has been included in the above analysis.
The procedure for a supplier to develop an optimal bid with
(16) regard to minimum output is as follows.
1) Estimate the value of ( , and ).
The objective function is subject to the constraints of (7), (12) 2) Obtain and from (8), (9).
and (13). 3) Obtain from (23).
816 IEEE TRANSACTIONS ON POWER SYSTEMS, VOL. 16, NO. 4, NOVEMBER 2001

TABLE I TABLE III

BID INFORMATION FOR SUPPLIERS AT ONE HOUR RESULT FOR SUPPLIERS (MINIMUM OUTPUT OF SUPPLIER 4 IS 70 MW)
=
LOAD REQUIREMENT 1710 MW

estimates the information of Supplier 3, Supplier 5 (its com-

petitor) and the system as follows.
/MW, MW, /MW.
MW and
TABLE II
RESULT FOR SUPPLIERS (MINIMUM OUTPUT OF SUPPLIER 4 IS 40 MW) MW.
=
LOAD REQUIREMENT 1710 MW The optimal bids can be calculated as:
From (8) and (9)
MW, MW.
From (23)
/ MW
As , then from (24), we get
4) Get from (24). .
5) Get from (25). From (25), we get
Then and are the optimal strategic bids.
It should be noted that in practice it would not be easy to /MW.
estimate , and it needs further analysis. Setting 70 MW and $12.16/MW
for Supplier 4, the market clearing result through simulation
is shown in Table III.
V. NUMERICAL EXAMPLE
It is seen that Supplier 4 succeeds in competition with Sup-
A numerical example is given to demonstrate the derived plier 5. In this case, Supplier 4 enhances its benefit. We obtain
strategic bidding with regard to minimum output. the benefit of Supplier 4 as
A 14 bus, 8-supplier and 7-customer system is used in our . Clearly and even .
study. The system configuration is described in detail in [9]. Therefore, by fine-tuning the submitted minimum output and
The bidding data are designed by the authors to create suitable price, it is possible for Supplier 4 to gain more benefit. In fact,
system operation conditions. The following results are obtained Supplier 4 has the opportunity to gain benefit of no more than
using the developed power pool simulation system presented in .
[9]. It can be seen that the proposed method can be used by a sup-
The analysis of strategic bidding is carried out from the view- plier as a strategy for optimizing its own benefit by adjusting its
point of Supplier 4. For Supplier 4, its cost function parameters bidding data with regard to the price and minimum output under
are , , and its real minimum certain conditions, while ensuring that it succeeds in competi-
output is MW. The bidding data for suppliers tion with other suppliers for commitment. The above analysis
at one hour are shown in Table I. It is seen that the minimum carried out with two competitors can be extended to the case
output submitted by Supplier 4 is 40 MW. Table II shows the with more than two competitors. In this case, Supplier 1 will
market clearing result for this hour obtained by using the simu- get the optimal strategic bids respectively on condition that it
lation system. competes with every competitor. The bid with the minimal op-
From Table II, it can be seen that the power output of supplier timal benefit is the final optimal strategic bidding scheme which
4 is 40 MW (its minimum output bid) at the price of $13.20/MW. ensures its successes in competition with any other competitors.
In this case, the benefit for Supplier 4 is
. Using data from Table I,
it may be noted that if the price of Supplier 4 were more than VI. EXTENDED ANALYSIS
that of Supplier 5 ($13.38/MW), Supplier 5 would have been
committed instead of Supplier 4. Therefore, competition exists In the above analysis, we assumed that
between Supplier 4 and Supplier 5. When Supplier 4 submits its and . In practice, this need not
minimum output as 40 MW, to keep it as committed, its price always happen. When this condition is not satisfied, the problem
cannot exceed $13.38 /MW. This means that the benefit gained will become more complex. In this case, to make Supplier 1
by Supplier 4 will not exceed or Supplier 2 operate at least at its minimum output, it is not
in this case. enough for only the supplier with price to reduce its output
Before Supplier 4 is committed, Supplier 3 is the committed by . Some other committed suppliers must also reduce
supplier with the highest price. Assuming that Supplier 4 their outputs as well.
SHRESTHA et al.: STRATEGIC BIDDING FOR MINIMUM POWER OUTPUT IN THE COMPETITIVE POWER MARKET 817

MO and P of Supplier 1 when MO 0MW >

Fig. 5. Feasible range of
MW MO 0 MW > MW .
Fig. 4. Competition of two suppliers with different minimum outputs when
MO 0 MW > MW or/andMO 0 MW > MW . or/and

Suppose that the available reduction power is with where the sum of equals in both
price , then the cost when committing Supplier 1 is cases.
The following analysis is carried out for the two cases.
(26) 1) : When , is the price when the
reduced power reaches , marked as . Obvi-
ously, all the other is less than . Therefore, we get
where

(27) (32)

The cost when committing Supplier 2 is 2) : When , is the price when the
reduced power reaches . Obviously, all the other
(28) is greater than . Therefore, we get

where (33)

(29)
Using (32) and (33), the sufficient condition for (30) can be
obtained as
For Supplier 1, to be selected over Supplier 2, or
(34)

In this case, Supplier 1 will be committed. Since the esti-

(30)
mate of is simpler than that of , the complexity to submit
strategic bid with regard to minimum output will be reduced in
Fig. 4 shows the competition of two suppliers with different this way.
minimum outputs when or/and From (34), we get
.
In Fig. 4, the total area with left-down slope strips (35)
represents— when , while the total area with
left-up slope strips represents when . The relationship between and of Supplier 1 is sim-
It is seen that a supplier needs to acquire more information ilar to that in Fig. 3 when the information of Supplier 2 as well
in order to submit minimum output with strategy, since the es- as are estimated. However, since will change with the
timate of is more complicated. To utilize the strategy with change of , the curve will be a bit more complex as well.
regard to minimum output, the following method is proposed to Fig. 5 shows the curve composed of several stages.
approximate . In fact, the number of stages is .
From (30), we can get In Fig. 5, the solid curve is expressed in (30). The dashed
curve is that when is replaced by in (30).
when It can be seen that the dashed curve falls below the solid one.
The area with slope strips surrounded by dashed line is where
(31) Supplier 1 remains committed.
when Since the constraint or
is no longer applicable in this case,
818 IEEE TRANSACTIONS ON POWER SYSTEMS, VOL. 16, NO. 4, NOVEMBER 2001

can not be determined by (9). However, from (35) when on the supplier’s benefit. This will pave the way for further de-
, is obtained as, velopments in strategic bidding considering such operational
parameters.
(36)
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analyzes the effect of minimum output on the result of compe- International Conference on, 1999, pp. 1–13.
tition in a deregulated environment. A criterion is presented to
evaluate the result when there is competition for commitment
among suppliers with different minimum outputs. Further, the
G. B. Shrestha (S’88–M’90–SM’92) received the B.E. (Honors) degree in elec-
method to optimize an individual supplier’s benefit by adjusting trical engineering from Jadavpur University (India) in 1975, the MBA degree
the minimum output and price is proposed when there is limited from University of Hawaii in 1985, the M.S. degree in electrical power engi-
market size because of, say, limited number of suppliers in the neering from RPI in 1986, and the Ph.D. degree in electrical engineering from
Virginia Tech in 1990. His main area of interest is power system operation and
market itself or due to transmission congestion. The minimum planning.
output in this sense need not be the equipment’s physical limit
but a business strategy to enhance benefits.
A numerical example has been presented to illustrate the im-
pact of the optimal bid by a supplier regarding minimum output. Song Kai (S’99) received the B.E. and MS. degrees in electrical engineering
It is shown that the possible benefits cannot be ignored and from Tsinghua University (P. R. China) in 1993 and 1997, respectively. He is
currently studying for the Ph.D. degree in electrical engineering at Nangyang
strategic bidding can provide an individual supplier the oppor- Technological University (Singapore).
tunity to gain more benefit by fine-tuning the bid for minimum
output and price. Some assumptions made in the analysis may
not hold precisely in practical situations. For example, the infor-
mation on the load and about other suppliers will not be easy to L. Goel (M’92–SM’95) received the B.Tech. degree in electrical engineering
estimate. However, significant insight is gained from the anal- from Regional Engineering College, Warangal, India in 1983 and the M.S. and
Ph.D. degrees in electrical engineering from the University of Saskatchewan,
ysis of bidding strategy developed in the paper and it provides Canada in 1988 and 1991, respectively. His research interests are power system
valuable understanding of the effect of operational parameters reliability cost/benefit assessment of power systems.