Mitigation-Aware Bidding Strategies in Electricity Markets

TL;DR

This paper develops a mitigation-aware strategic bidding model in electricity markets to evaluate how market participants can exercise market power despite mitigation mechanisms, affecting prices and social welfare.

Contribution

It introduces a bilevel bidding model incorporating mitigation constraints and reduces it to a single-level MILP for analysis of strategic behavior under current mitigation practices.

Findings

Strategic players can increase profits despite mitigation.

Market power exercise impacts social welfare.

The model provides insights into mitigation effectiveness.

Abstract

Market power exercise in the electricity markets distorts market prices and diminishes social welfare. Many markets have implemented market power mitigation processes to eliminate the impact of such behavior. The design of mitigation mechanisms has a direct influence on investors' profitability and thus mid-/long-term resource adequacy. In order to evaluate the effectiveness of the existing market power mitigation mechanisms, this paper proposes a mitigation-aware strategic bidding model and studies the bidding strategies of the market participants under current practice. The proposed bidding model has a bilevel structure with strategic participant's profit maximization problem in the upper level and the dispatch problem for market operators in the lower level. In particular, the consideration of potential offer mitigation is incorporated as upper-level constraints based on the conduct and impact tests. This bilevel problem is reduced to a single-level mixed-integer linear program using the KKT optimality conditions, duality theory, and linearization. Numerical results illustrate how a strategic player can exercise market power to achieve a higher profit even under the current market power mitigation process and we analyze the social impact that the market power exercise results.