2004 IEEE International Conference on Electric Utility Deregulation, Restructuring and Power Technologies (DRPT2004) April 2004 Hong
Kong
The Comparisons Between Pricing Methods On Pool-Based Electricity Market using Agent-Based simulation
Zou Bin',' IEEE member Yan maosong'
1. Shanghai University, Automation department, Shanghai China, 200072
2. Southem Yangtze University, electric engineering laboratory, Wuxi China, 2 1'4036,
Abstract: Because of the existences of market power and
economies of scale, there have been various pricing methods
proposed for pool-based electricity market, for example,
uniform clearing pricing method (UCP), pay as bid pricing
(PAB) and the Electricity Value Equivalent (EVE) pricing
method. An agent-based simulation model is developed in this
paper to compare the market characteristics under different
pricing methods. In this model the generators leam bidding
strategy using reinforced leaming algorithm in repeated bidding
game to seek for their maximum profits. Simulation result is
presented based on the data from IEEE Reliability Test System,
showing that the EVE pricing method has many market
characteristics better than other pricing methods. For example,
when EVE is used in market pricing, there exists little room for
a power supplier to raise the market price by his strategic
bidding and the market becomes robust in some sense. And
also EVE provides an intrinsic and reasonable mechanism to
compensate the capacity investment automatically.
Key Word: Pool-based electricity market pricing method
agent-based simulation
1. Introduction
The marginal cost pricing methods, such as those of uniform
clearing pricing (UCP) and node pricing prevail in electricity
auction. Despite that microeconomics tell us that the perfect
competitive market would achieve the equilibrium that is
Pareto efficient under the conditions that films' production
function is convex, continuous and their profits are bounded
below from zero ['I, the actual electricity market, however,
tends to be characterized by an oligopoly of generators ['I.
Besides, there is very little demand-side elasticity in the short
term, and the economies of scale do not vanish. In the various
national electricity markets, the generators' market power
persecutes the power pool and the reserve margin has
continually declined because of uncertainties about cost
recovery for new generation investment [31[41.
So new pricing methods have been proposed to overcome
these problems, for instance, the discrimination method----pay
as bid (PAB), which was expected to restrain the generators'
market power. And in China the electricity value equivalent
(EVE) pricing methods [51-[71 have been developed to improve
market efficiency, to adequately and reasonably retum
investment and to adequately and reasonably restrain the price
peak in pool-based market.
There are various game models to discuss the generators'
strategic behavior in electricity market [81-['41. But conventional
economic modeling approaches have shown a very limited
ability in dealing with electricity auction, especially when PAB
or EVE are employed as pricing method in the market. It is
obviously important to provide concrete evidences to forecast
the market characteristic before the pricing rules are put in use
in practice. In this paper, agent-based simulation method is
employed to estimate the market price and generators' strategic
behavior in pool-based electricity market for various pricing
method, such as UCP, PAB and EVE. In this simulation method
the agents and the market clearing mechanisms, together with
the reinforced leaming algorithm used by the agents provide a
computational framework to estimate the equilibrium price. A
simulation result based on the data of IEEE Reliability Test
System ["I is presented, which shows that the EVE pricing
method has many market characteristics better than others. For
example, when EVE is used in market pricing, there exists little
0-7803-8237-4/04/$17.0002004IEEE
285
Xie Xianya'
room for a power supplier to raise the market price by his
strategic bidding and he is induced to bid in accordance with
his cost and the market becomes robust in some sense. And also
EVE provides an intrinsic and reasonable mechanism to
compensate the capacity investment automatically.
This paper is organized as follows. The notations are
arranged in section 2, the simulation model is described in
section 3, and the simulation result is reported in section 4.
Finally, the market characteristics of the various pricing
methods are summarized in section 5.
2. Notations
A the action set of the unit
[AI the elements number of the action set
B,, the quotation of the m-th unit of firm i
K the number of the block in units' quotation
KIlePthe normal coefficient, equal to 20-100.
M , the unit number of the firm i
&,j(n) the choice probability of the m-th unit of firm i to
select action j in n round
q,,(n) the propensity of the m-th unit of firm i in n round
Q,,, the production energy of the m-th unit of firm i
R, leaming excitement of the firm i
R,,,, leaming excitement of the m-th unit of firm i
&'' the k -th capacity block's capacity in the
quotation of the m-th unit of firm i
x,,"" the total capacity of the k -th capacity block's capacity
in the quotation of the m-th unit of firm i
x,,.,~ the purchased capacity of the k -th capacity block's
capacity in the quotation of the m-th unit of firm i
x:, the k -th capacity block's capacity in
the cost based bid of the m-th unit of firm i
ai,,pi,,yim the coefficient of the quadratic cost function
of the m-th unit of firm i
bid
, k = 1,2,...,K the k -th capacity block's price in the
quotation of the m-th unit of firm i
the purchased price of the k -th capacity block in the
P,",,~
quotation of the m-th unit of firm i
,
:
:I the k -th capacity block's price in the cost based bid of
the m-th unit of firm i
the k -th capacity block's shadow capacity value of the
m-th unit of firm i
the k -th capacity block's capacity value of the m-th unit
offirm i
n, the profit of the firm i
-
n, the average profit of the firm i over all round
3. The electricity auction models in agent-based
simulation
3.1 simulation frame
In day-ahead electricity auction, the system operator is the
unique one buyer, and he forecasts the next day load demand.
2004 JEEE International Conference on Electric Utility Deregulation, Restructuring and Power Technologies (DRPT2004) April 2004 Hong Kong

Generator's firms bid their selling price for each unit, together M,

with their capacity. Each unit's capacity can be divided into max =I = -pd (7)
",=I
several blocks. These blocks' biding prices can be different, but In (6), the actual selling prices are determined by pricing
the prices must ascend accordingly as capacity increasing. The method and all units' bids. In this paper we investigate three
quotation of the m -th unit of firm i can be expressed as: pricing methods, UCP, PAB and EVE, which will be discussed
y 1
4, = {(x ,Pid, (X$? P:::2 ' ' ' ,( X Z P& )} 1 ( 1.1
7 in section 2.2.
It is obvious that all the optimization problems (7) of each
p:;:) I p y 2 I ...I pi$ ( 1.2)
firm and the pricing method compose a game. Solving the
K
game by optimization method is difficult, especially when PAB
CX,"?.k 5X Z ( 1.3 1
k=l or EVE is used as the pricing method.
Suppose the unit's cost function can be written as quadratic In agent-based simulation, the firm select Ap,,,, from the
function, it is action set according to a choice probability, 4m,s. And the
Cm (Qzm I= a;mQfn + Pim ' Qim + ~ i m (2.1) choice probabilities are updated according to firm's profit
K
obtained by the action s through reinforced learning (this will
Qim =C X i m . k (2.2) be discussed in section 2.3).
k=l

and it can be expressed as discrete formulation, named Figure 1 shows the simulation flow chart. At the beginning
cost-based bid, it is: of the first round of the auction, each unit assigns a uniform
probability to each possible action among the action set. Then it
B,:?' = {b:mOy,,' 1
x:', : ; ~ ,(p:mOyL1 .:m":i )}
( ~ 2 ~2:; 1(3.1
t..
chooses the action from the action set by its probability, and
forms the quotation according to (1)-(4). At the end of the
auction round, each unit then calculate and update the choice
probabilities for the next round according to the profit obtained
The relationship between actual bids with cost based bid is in last round. The choice probability will converge to
equilibrium position along with the repeated auction, if the
PKk = P:m"?j+ (4.1)
learning is rational enough.
X K k =x:; (4.2)
The aim of generators firm's strategy is to select for each unit 3.2 Clearing mechanism
the different price A P , ~from the action set A to seek for their The uniform clearing pricing method is well known. After
maximal profits. The action set is firms submitting their units' bid, system operator arranges the
capacity blocks in the order of their bidding prices, then
A={AP,,AP~,-,AP,} (5) purchases the blocks from the cheapest one until the sum of the
0 E A is essential that means biding by cost. Though each unit purchased capacities equals the load demand. The last capacity
has it own cost function it is acceptable to suppose that all units block's price is the marginal price, and all purchased capacities
have the same action set A , because the action means the are paid off by marginal price. The clearing mechanism of the
difference between price with the cost. pay as bid pricing method is similar to that of uniform clearing
The profit of the firm i 's m -th unit is pricing method, except that all purchased capacities are paid off
by their bidding price, rather than the marginal price. In UCP
and PAB auction, the daily load demand is expressed by load
level in time sequence, and in each period of time, the
generator firms should submit their bids. In EVE auction,
however, things are different.
The firm i seeks for his maximum total profits, that is Comparing with UCP and PAB, the basic concept of EVE
has the following specialties (see [5]-[7] for details): 1, Any
el ectri c i t y aucti on si ml ati on unit only submits its bid once a day, including number of
blocks and their capacity sizes as well as their operational costs.
A 2 , The daily load demands is expressed in load duration curve,

I i n i t i a l i z e the choice probability

i t e r a t i v e nuher$)
based on which the system operator (SO) arranges all the bids
in merit loading order and then determines which blocks with
how many hours are to be purchased. 3, According to the
Capacity Cost Reference Systems (CCRS), which are given by
with their choice probability, and the govemment and composed by sets of reasonable average
capacity cost and corresponding average operational cost, the
SO determines for each purchased block the purchase price,
Glculate price and firm' profits which consists in two parts: one corresponds to the operational
out cone accor di ng t o the pr i ci ng mt hod cost, which is equal to the bidding price of this block, and
another is corresponding to the shadow capacity cost and
employed time interval of this block, which is to be used to
F i r m uses t h i s p r o f i t t o update the new compensate the capacity investment. Another important role
choice probability f w the next round played by CCRS is to restrain the skyrocket of the price (price
c peak) in the case of high load demand.

s
I Iterat i ve nuntoer add 1
I t erati ve nunber i s over?
Figure 1 the simulation flow chart
It is obvious that under the condition of identical
I distribution of the bids, the purchased capacity will be the same
in all the three pricing method, but their payments will not be
identical, The total payment in PAB auction seems the lowest,
and the highest seems that in EVE auction. But it cannot be
confirmed that the (average) market price in PAB auction is the
lowest, because the pricing rule will result in specific agent
behavior and the market status. This must be investigated in the
equilibrium status.

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2004 IEEE International Conference on Electric Utility Deregulation, Restructuring and Power Technologies (DRPT2004) April 2004 Hong Kong

Table 1 the generator type, the cost function and bidding based on cost
cost function cost based bid
2; capacity
MW
block 1 block 2 block 3 block 4
unit a.1000 P'lOO ~1 ~2 capacity price capacity pricc capacity price capacity price
MW $/kWh MW $kwh MW $kwb
U400 400 0.0039 3.4459 0 1.2 200 0.036 320 0.037 400 0.0376
U350 350 0.013 2.9841 0 0.98 0.0335 227.5 0.0357 280 0.0371 350 0.0389
U197 197 0.0199 3.0645 0 0.47 68.95 0.0334 118.2 0.0353 157.6 0.0369 197 0.0385
U155 155 0.022 3.039 0 0.31 54.25 0.0328 93 0.0345 124 0.0359 155 0.0372

U100 100 0.0477 3.0014 0 0.17 0.0324 50 0.0348 80 0.0376 100 0.0396

U76 76 0.1227 3.2743 0 0.11 15.2 0.0365 38 0.0421 60.8 0.0477 76 0.0514

U20 20 1.3816 0.1651 0 0.02 15.8 0.0453 I8 0.0514 19.8 0.0564 20 0.0569

U12 12 0.6266 3.5997 0 0.01 nnw 6 0.0435 9.6 0.048 12 0.051

Do j=1 t o S
3.3 Reinforced leaming algorithm I
The reinforced leaming algorithm applied in this paper was Calculating the new choice probability by (14)
developed in [I61 and [ 171, which was shown to be able to seek 1
the unique equilibrium over a wide variety of multi-agent I
repeated games. The key idea is the 'law of effect principle'
that has been widely accepted in the psychological learning 4. Casestudy
literatures. For the aspect of the calculation, the action's result In this section, the results based on the IEEE-RTS data are
(profit) is used to form the excitement for leaming, and the to be reported. Table 1 is the unit type in the system, the
learning excitement was employed to calculate the propensity, coefficients of their cost functions, and cost based bid. Note the
then the choice probability was updated by the propensity. coefficient of the quadratic cost function, y . For which there
At the beginning of the first round of the repeated game, the are 2 cases: the one y l is zero that ensures the marginal cost
choice probability is uniform, and can be written as being always bigger than the average price which implies no
economies of scale in this case, and the other y 2 is a positive
number that means the marginal cost may be less than the
At the nth round, after the firm's profit is obtained by (6),
then his leaming excitement can be calculated by 022 I I , I , , I I I

8 =.,-? (9) 02 - I .

0 18 -
016-

Because M,units are in possession of the firm i , the

learning excitement must be assigned to each unit in the light of E 01-
the units' capacity, that is

\the marginal cost price

Suppose the selected action of unit im at the nth round is s, then "55 o& 06 o k 0.'7 075 o'a o i5 0'9 oi5 1
the rate between the load level with the total available capacity. %
the propensity of the action among the action set is
(a) case A

q,,",j ( n + 1) = .IR,,nl.<",,,( n )+ -L,j(4J= 1>2,...,s (1 3)

02
The new choice probability for the next round is

IS
J L , , ( n+ 1 ) = ,,,,,, ( n + 1) x q b , , L ( n + I),
E=l

The leaming algorithm of firm i can be summarized in the

i = 1,2,...,S (14) the price In the PAB

following: E Ol-

Calculating learning excitement of thefirm i 's by (9) the marginal cost price

Dom=I to M , 005 -

Calculating unit m k excitement by ( I I ) 0' 1 ' " " " '

05 055 06 065 0 7 075 0 8 085 09 095
Do j = l to S the rate between the load level wlh the total available capacipty, %

(b) case B
Calculating the propensity by (12) and (13)
I Figure 2 the price curve along with the load increasing
Calculating the sum ofthe propensity

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2004 E E E International Conference on Electric Utility Deregulation, Restructuring and Power Technologies (DRPT2004) April 2004 Hong Kong

Table 2 the data of generators at bus and their owner higher than that in UCP auction.
Suppose the fixed cost is a positive number, the daily load
total generator the share is shown in Figure 3, and the capacity cost reference system
firm units' type
capacity MW %
data is that shown in Table 3. The simulation results for EVE
__ ~ ~

1 U400 U400 800 0 229 are shown in Table 4.It can be concluded that (1) By the EVE
pricing method, the total purchasing expenses and the average
U20 U20 U76 U100 U197 U197
2 877 0251 price are the same for case A and for case B, meaning that
U12 U12 U12 U155 U76 bidding behaviors in these two cases are the same. We have
U76 U20 U20 U100 U197 U12 further investigated unit's bidding in the equilibrium status,
3 887 0.254 finding that all the units select the 0 as their optimal action
U155 U76 U76 U155
from the action set, namely they submit their cost as bid. (2) In
U76 U76 U100 U12 U12 U76 case A, the average price and the total purchasing expenses for
4 933 0.267
these three pricing methods do not have any signifi6ant
------- U76 U155 U350
difference. The maximal difference of the total purchasing
expenses is only 0.37%. But in UCP auction and PAB auction
average price which implies economies of scale in this case. there are some firms bearing the negative profits while bidding
There are 32 units in the power system. The total available the price higher than their marginal costs. This market is
capacity is 3497 MW, and all units' types are shown in Table 2. difficult to regulate under PAB and UCP auction. In EVE,
For the sake of comparing the effect of the share of firms on the however, all the firms have positive profit and submit bids
market, the number of the firms are divided into two cases: one equal to their costs. (3) In case B, the total purchasing expense
is that each firm has only one unit (for example, the maximal and the average price in UCP and PAB methods are higher than
firm has a 400MW unit which share is 11.44%), noted as case those in EVE, while those in PAB are higher than those in UCP
A; and another is noted as case B, where there are four firms, showing that the prices of these two pricing methods are
and their unit distributions are shown in Table 2. sensitive to the loading share of the firms.
The action set was set was All these results show that there is excellent market
0, 0.01, 0.02, 0.03, 0.04, 0.05, 0.06, characteristic in the electricity market using the EVE pricing
0.07, 0.08, 0.09, 0.10, 0.11, 0.12 0.13 method. The robust property in EVE comes from the two
0.14. 0.15, 0.16, 0.17, 0.18, 0.19 peculiarities: the capacity cost reference system and bidding
once a day. The readers could refer to [5]-[7] for the
mechanism about EVE.

Table 4 the results under position fix cost

CASE A CASE B
total total
pricing purchasing average
price
purchasing average
price
expenses expenses

Kilo- dollar $/kWh Kilo- dollar $/kWh

lwurs
Figure3 the daily load cure
The simulation results in the condition of the zero fixed
cost ( y l ) for UCP and PAB are shown in Figure 2. The
horizontal axis in Figure 2 denotes the ratio of the load demand
with the total available capacity, and Fig.2(a) is the result under
firms' share being in case A, while Fig.2(b) is that for case B.
The results show that (1) decreasing the firms' capacity
share of the total available capacity is important for restraining
the generators market power. The prices in case B are
obviously higher than those in case A, no matter UCP or PAB;
(2) the result is not satisfactory enough by only cutting down
on the firms' share because the price is very high while the
demand approaches to the total available capacity even in case
A; (3) the PAB pricing method can not restrain the generator
firms' market power, so that price in PAB auction may even be
Table 3 the data of the capacity cost reference system
reference unit operation cost capacity cost
NO. $/kWh $/MW.daily
1 0.05 0.844
2 0.042 0.9
3 0.03 1.104
EVE price 5204.2 0.0848 5204.2 0.0848
UCP 4254.98 0.0693 8178.56 0.1332
PAB 5841.24 0.0951 7567.28 0.1232
5. Conclusion
In this paper an agent-based simulation model has been
developed for the comparison between the various pricing
methods in pool-based electricity market. And the results based
the IEEE RTS data has been reported. It shows that the
generator firms possess of much market power in the auction
by UCP pricing even if they have less market share while the
load demand approach to the total available capacity. And the
market price in the PAB auction does not appear to have
significant difference with that in UCP auction, it means that
the PAB pricing method is not able to restrain generators'
market power in electricity auction. When the fixed-costs are
positive value and the marginal cost is less than the average
cost, which means economies of scale, there are some units
bearing the negative profits but bidding price higher than their
marginal price in pricing by UCP or PAB. While in EVE
auction all units have positive profit and submit their cost as
bid, it means that when EVE is used in market pricing, there
exists little room for a power supplier to raise the market price
by his strategic bidding and the market becomes robust in some
sense. All these results show that there are many excellent
market properties in the electricity market employ in the EVE
pricing method.

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2004 IEEE International Conference on Electric Utility Deregulation, Restructuring and Power Technologies (DRPT2004) April 2004 Hong Kong

Acknowledgements With Unique, Mixed Strategy Equilibria’, The American

The work reported in this paper was supported by National Review, Vo1.88, No.4, 1998, p848-881
Natural Science Foundation of China (NSFC) under grant
59937150, Zou Bin He received a B.A. in automation from Wuhan
Chemical Engineering University in 1984 and an M.S. from the
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