Analyzing the Impact of Strategic Bidding on the Reserve Capacity via a Bi-Level Model

TL;DR

This paper models how strategic bidding by power companies affects reserve capacity and market efficiency, revealing that such behavior can increase reserves but also raise costs, emphasizing the importance of market design.

Contribution

It introduces a bi-level model to analyze strategic bidding impacts on reserve capacity, incorporating continuous approximations for unit commitments.

Findings

Strategic bidding can increase system reserves in imperfect markets.

Some units operate mainly for profit, raising electricity costs.

Market design influences the reserve-competitiveness trade-off.

Abstract

The growing integration of renewable energy sources necessitates adequate reserve capacity to maintain power balance. However, in market clearing, power companies with flexible resources may submit strategic bids to maximize profits, potentially compromising system reserves. This paper examines the effects of such strategic behavior by modeling the market as a bi-level problem. The upper level represents a strategic company aiming to maximize profit, while the lower level simulates the system operator clearing the market based on submitted offers. To enable duality-based solution methods, we approximate unit commitments with a continuous reserve capacity calculation. Case studies indicate that, in an imperfectly competitive market, more units are incentivized to operate,enhancing system reserves. However, some units go online mainly for profit, ultimately raising electricity costs for consumers. These findings highlight the importance of market design in managing the trade-off between reserve adequacy and economic efficiency in the presence of strategic bidding behavior.