Price formation and optimal trading in intraday electricity markets with a major player

TL;DR

This paper models price formation in intraday electricity markets with a major producer and many small producers, using mean field game theory to derive optimal strategies and equilibrium in the presence of renewable intermittency.

Contribution

It introduces a mean field game framework with a major player to analyze strategic interactions and optimal trading in electricity markets with renewable generation.

Findings

Closed-form Nash equilibrium strategies derived

Optimal trading strategies account for market impact

Framework extends previous models to include a major player

Abstract

We study price formation in intraday electricity markets in the presence of intermittent renewable generation. We consider the setting where a major producer may interact strategically with a large number of small producers. Using stochastic control theory we identify the optimal strategies of agents with market impact and exhibit the Nash equilibrium in closed form in the asymptotic framework of mean field games with a major player. This is a companion paper to [F\'eron, Tankov, and Tinsi, Price formation and optimal trading in intraday electricity markets, arXiv:2009.04786, 2020], where a similar model is developed in the setting of identical agents.