Models of Strategic Bidding in Electricity Markets Under Network Constraints

Starting from the nineties of the last century, competition has been introduced in the electricity industry around the world, as a tool to increase market efficiency and decrease prices. Electricity is a commodity that needs to be traded over a physical network with strict physical and operational constraints that cannot be found in other commodity markets. Present electricity markets may be better described in terms of oligopoly than of perfect competition from which they may be rather far. In an oligopoly market, the producer is a market player that shows strategic behavior, submitting offers higher than the marginal costs, as they under perfect competition, with the aim to maximize its individual surpluses. The market clearing price, quantities and the market efficiency depending on the strategic interactions among producers must be taken into account in modeling competitive electricity markets. The network constraints provide very specific opportunities of exercising strategic behaviors to the market participants. Game theory provides a conceptual framework and analytical tool to model such a context. The modeling of electricity markets will be presented by discussing the traditional Game Theory models, such as bertrand, cournot, conjecture supply function, supply function equilibrium, adapted to be able to capture, in determining the Nash equilibrium, the network structure of the system in which the market is implemented. A formalized representation and a comparison of some of the most common game theory models will be provided with some conceptual examples. In addition, some newly proposed approaches for strategic bidding modeling based on the complex systems techniques such as Multi Agent systems and Complex Networks will be mentioned and some related references provided.