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2, MAY 2006


Nash Equilibrium in Strategic Bidding: A Binary Expansion Approach
Luiz Augusto Barroso, Member, IEEE, Rafael Dix Carneiro, Sérgio Granville, Mario V. Pereira, Member, IEEE, and Marcia H. C. Fampa

Abstract—This paper presents a mixed integer linear programming solution approach for the equilibrium problem with equilibrium constraints (EPEC) problem of finding the Nash equilibrium (NE) in strategic bidding in short-term electricity markets. A binary expansion (BE) scheme is used to transform the nonlinear, nonconvex, NE problem into a mixed integer linear problem (MILP), which can be solved by commercially available computational systems. The BE scheme can be applicable to Cournot, Bertrand, or joint price/quantity bidding models. The approach is illustrated in case studies with configurations derived from the 95-GW Brazilian system, including unit-commitment decisions to the price-maker agents. Index Terms—Electricity pool market, game theory, market models, mixed-integer linear programming (MILP), Nash equilibrium (NE).



NE of the key components in liberalized power sectors [1] is the short-term electricity market, where hourly energy prices are set as follows: 1) at the end of each day, generators and loads bid hourly prices and quantities for the next 24 h; 2) an economic dispatch is then simulated for each hour, where a clearing price is adjusted until the total energy generated equals the total energy consumed; and 3) the final clearing price, or spot price, is used to remunerate/charge all energy sales/purchases. The existence of a bid-based market poses complex challenges for both market agents and regulators. For the agent, the question is how to develop bidding strategies that maximize their revenues. Conversely, regulators will be interested in analyzing those bidding strategies, in order to prevent market power abuses. The basic challenge for a strategic bidder is that its revenue depends on the bids of all other agents, who also act strategically. Thus, all bidders endeavor simultaneously to maximize their respective revenues, trying to anticipate and counteract the strategic behavior of theirs competitors. This type of interaction is usually modeled by game-theoretic concepts [2], in particular Nash equilibrium (NE), and has been extensively used in the studies of competitive energy markets (see, for example, [3] and [4]).

Manuscript received October 27, 2004; revised October 16, 2005. Paper no. TPWRS-00568-2004. L. A. Barroso is with Power Systems Research, Rio de Janeiro, Brazil and is also with the Systems Engineering and Computer Science Program, COPPE/UFRJ, Rio de Janeiro, Brazil ( R. D. Carneiro is with Princeton University, Princeton, NJ 08544 USA (e-mail: S. Granville and M. V. Pereira are with Power Systems Research, Rio de Janeiro, Brazil ( M. H. C. Fampa is with Instituto de Matemática/COPPE-Sistemas, UFRJ, Rio de Janeiro, Brazil (e-mail: Digital Object Identifier 10.1109/TPWRS.2006.873127

The objective of NE is to find a set of bids with the following property: no agent can individually improve its revenues by modifying its bid, if the remaining agents offer the equilibrium bids. If the usual game-theoretical assumptions are met (rational behavior, complete and perfect information) and there is only one solution to the NE conditions, then agents would be expected to offer these equilibrium bids. Although real-life bidding conditions are unlikely to fully match those theoretical assumptions, the NE approach remains a powerful tool, both for devising bidding strategies and for simulating the effect of countermeasures for market power mitigation. The objective of this paper is to present a solution scheme for the calculation of Nash equilibria in bid-based electricity markets. As it will be shown, the NE conditions correspond to finding a feasible solution to a set of I constraints, where I is the number of strategic bidding agents (those that can influence the market prices with their bids, or “price makers”). The major difficulty is that the right-hand side of each conis a nonlinear, nonconvex optimization substraint problem, where agent determines its maximum-revenue bids, given assumptions about all the other agents’ bids. Most proposed solution approaches to the NE problem use either 1) an iterative scheme [5], [6]: successively “freeze” the bids of all agents but one, solve the revenue maximization for this remaining agent, and repeat the iterative process until there is no change; or 2) apply the Karush–Kuhn–Tucker (KKT) optimality conditions to each optimization subproblem, in order to transform it into a set of nonlinear constraints; and thus solve the whole set of constraints simultaneously, using specialized equilibrium algorithms [7]–[12]. Both schemes have been successfully applied to a wide range of situations. However, some limitations have also been identified, such as convergence difficulties in the iterative case, and the nonguarantee of an optimal solution with the KKT conditions due to the problem nonconvexities. Also, it may be difficult to identify multiple Nash equilibria. The NE solution methodology described in this paper tries to alleviate some of the above limitations, introducing the followingapproach:1)replacethecontinuousbidsbyasetofdiscrete values; this allows the enumeration of the solutions of each optimization subproblem in the right-hand side (RHS) of the NE constraints; 2) in the previous step, we transformed the NE problem into a set of nonlinear integer constraints; we now apply a binary expansion (BE) transformation [13] to the nonlinear terms, thus obtaining a set of mixed integer linear programming (MILP) constraints; and 3) we use a commercial solver to find a feasible solution to the MILP constraint set, which will be the NE.

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Section IV discusses extensions to the Nash-MILP model. 2. such as in Spain. and emission constraints) or bids in other markets. and is agent ’s maximum generation capacity. The ED as modeled in (1)–(3) is a linear programming problem. C. i. This Note that problem (5)–(6) has a nonlinear term. Coupling constraints (such as ramping. Bertrand (agents bid prices and full capacities) or Cournot (agents bid quantities at a zero price). affect prices) are indexed by As shown in [14]. and is the unit operation cost ($/MWh) of agent . where strategic agents only bid quantities. fuel. each price at a zero price. II. among others and 3) identification and enumeration of multiple Nash equilibria. The remainder of this paper is organized as follows. the main conclusions are summarized. Peru. MAY 2006 Because all constraints are represented in an MILP environment.. Associated to each constraint (2). Because the price makers bid a zero price.630 IEEE TRANSACTIONS ON POWER SYSTEMS. and [16].K. except an energy-only market. [15]. Nash Equilibrium (NE) In the agent ’s bidding problem (5)–(11). The objective of this paper is then to introduce the framework for the aforementioned modeling approach in an energy-only bid-based electricity market. In Section II. Agents and Bids Price maker agents (who can affect market prices with their bids) are indexed by . because of the MILP environment. . such as: 1) unit commitment in the calculation of operating costs. except agent . As seen in [13]. and a Cournot bidding model. In this paper. This will be discussed further in this paper. E. is nonlinearity is made more complex because the spot price a multiplier associated to the load supply constraint in the ED’s optimal solution [see (1)–(3)]. the system to be analyzed still does not consider the transmission network: a single node or zonal approach. and both variables and simplex multipliers of the ED can be written simultaneously. 21. In the Cournot model [2]. In Section III. we assumed that remained “frozen. maker bids quantity B. the optimal price/quantity bid for each price . and taker is is the available capacity. we present in Sections II and III a simple NE formulation: one single stage. they are fully used (dispatched) in the ED. it is convex. the (3). Spot market auctions neglecting transmission constraints (or with zonal pricing schemes) are observed in some electricity markets worldwide. Price takers (who cannot . Norway. Colombia. NO. we can use the KKT complementarity conditions as shown in [13]. and Brazil. is assumed. A. More complex models and extensions are discussed in Section IV. no transmission constraints. Economic Dispatch (ED) Given the price/quantity bids of all agents. the U. and in Section VI. China. Agent ’s objective is to determine known: the bid quantity that maximizes its net revenue (5) subject to (6) represents the maximization of for all feawhere sible values of . where all generators belonging to the companies being optimized are in the same zone. and benefit of increasing agent ’s quantity bid.e. there is a simplex multiplier: is the marginal marginal cost of increasing load supply. It is implicitly assumed that is greater than zero. where is the variable production cost.. this problem is a mathematical program with equilibrium constraints (MPEC) that is difficult to solve because of the prodin the objective function (5) and in constraint (11). the model can take advantage of recent improvements of MILP solution techniques but also can suffer from the computational complexity of integer programs. and 2) different bidding models: joint price/quantity. ucts which introduce nonconvexities. hence. it is possible to model a wide range of features. The net revenue is obtained by deducting the agent’s operation cost (4) where represents the I-dimensional vector of quantity bids of all price makers.” As mentioned in the the bids of agents . Net Revenues Each price maker receives a gross operating revenue ($) given by the product of its energy production (MWh) and spot price ($/MWh). are . D. Section V presents an application of the methodology in a case study derived from the Brazilian system. is the spot price. STRATEGIC BIDDING AND NE For ease of presentation. and constraint (3) represents limits on generation. Bidding Strategy Suppose that the quantity bids of all agents. we present an overview of the strategic bidding problem and NE concepts. a linear optimization model determines the most economic production schedule that meets an hourly load (assumed to be price-inelastic) (1) subject to multiplier (2) (3) Equation (2) represents load supply. Finally. are also neglected. Consequently. we formulate the Nash model as a nonlinear program and transform it into an MILP model. VOL. subject to constraints (6)–(11). as shown in the following: (7) (8) (9) (10) (11) Agent ’s bidding problem then becomes the maximization of (5).

the NE is any feasible solution to the MILP constraint set (16)–(18). example. Enumeration of Bids If the bids of each agent are a set of discrete values . we use a BE scheme to transform the products in (5) and (11) into mixed linear integer conof variables straints. large enough for (23) and (24) to be relaxed when and . in the case of multiple Nash equilibria (see next section). MILP Problem Solution As mentioned. Overview As mentioned in the Introduction. Multiplying both sides of (19) by . which can be solved by commercially available optimization software. the number of conof all agents is given by the product straints in (16)–(18) is the sum . The variable can be represented the plausible range as the following sum of binary variables: (19) where . the RHS maximization problems in (13)–(15) can be solved by enumeration. B. In other words. all agents endeavor simultaneously to maximize their respective revenues. and defining a new variable . the solution with the highest spot prices is generally the one 1For III. the NE conditions represent the result of this competition process and are modeled as follows. 2) the application of a BE scheme to transform the nonlinear terms in the constraints into mixed integer linear constraints. and is a binary variable. In this paper. PROPOSED SOLUTION APPROACH A.1 D.: NE IN STRATEGIC BIDDING: A BE APPROACH 631 Introduction. The NE condition for agent translates into the following constraint: (12) represents the MPEC bidding problem where (5)–(11). as follows: (16) (17) (18) The enumeration model (16)–(18) is computationally feasible because each RHS optimization problem is one-dimensional. Let be a vector of equilibrium bids. 1  j  Jg. BE Transformation In this step. Each of these steps will be discussed next. The NE solution is given by any feasible bid vector that meets simultaneously constraint (12) for all agents (13) (14) C. the objective function could be simply the equilibrium spot price) subject to the constraint set (16)–(18). The way it can be done is by solving an optimization problem with an arbitrary objective function (for example. . Final MILP Formulation for the NE Conditions Applying the transformations (19)–(24) to each net revenue function in the left-and right-hand sides of the NE conditions (16)–(18)—see Appendix A for details—we arrive at the final MILP formulation. This allows us to transform the optimization subproblems in the RHS of (13)–(15) into a set of nonlinear constraints. the product of variables in (21) is transformed into the following relation: IF THEN IF THEN (22) The IF-THEN relation is now modeled as an MILP expression (23) (24) where is a scalar constant. This was done so because. respectively. If all agents bid the equilibrium quantities. and 3) the solution of the resulting integer linear system of constraints by commercial solvers. although the number of possible bid combinations . (21) by the Equation (20) allows us to replace the product linear expression on the RHS. G could be max fc . agent ’s optimal bid will also be . be a set of discrete quantity bids in Let . E. Also as mentioned. trying to anticipate and counteract the strategic behavior of their competitors. we aim at maximizing the equilibrium spot price subject to the constraint set (16)–(18). . results in (20) (15) Problem (13)–(15) is therefore an equilibrium problem with equilibrium constraints (EPEC) and is the main focus of this paper. In turn. The BE scheme was introduced in [13] as a solution approach to the problem of strategic bidding under uncertainty in short-term electricity markets and is extended in this paper to the problem of finding NE in these same markets.BARROSO et al. the proposed solution technique comprises the following: 1) the proposed model looks for pure strategy equilibria in a discrete strategies space.

However. Therefore. hydro plants have “water values. and coupling constraints. which is “free. NO. with a total installed capacity (2003) of 95 GW. Brazilian System Overview The Brazilian generation system is composed of 150 plants. as discussed in [25]. In this case. but a higher division still does not prevent the nonexistence of NE in pure strategies [2] and directly affects the computational effort. Multiple Nash Equilibria Multiple Nash equilibria were observed in [17]–[21]. it is possible to identify multiple equilibria by using as an objective function the maximization of spot price and then successively solving new NE problems. B. Therefore. the BE is applied to the price and quantity decision variables to alleviate the products of variables in the objective function (5) and in the primal-dual constraint (11). B. i. we modeled the operating cost of . incorporating bounds for the equilibrium spot prices according to the previously solved problems. We can identify the existence of more equilibria by solving the same problem . meaning that they could also be included in the NE model presented in this paper. fuel. with different operating cost functions. Suppose that librium spot price associated to this problem. the model may eventually present the computational drawbacks that follow from limitations of the same integer programming algorithms in large-scale systems with multiple markets. as explained in Section III-E. where is the unit operating agent as a linear function cost. We will represent three of the largest. MODEL EXTENSIONS In this section. and other short-term constraints the approach presented in this paper may have strong computational complexity.e. On the other hand. natural gas. and Duke Paranapanema (2200 MW). we are not able to enumerate all of them. CASE STUDIES The BE solution to the NE will be illustrated with case studies derived from the Brazilian system. 21. This occurs when the set of constraints (16)–(18) has more than one feasible point (note that every feasible point is an NE). no NE exists for this problem. it may be the case that multiple equilibria are associated with the same equilibrium spot price. This extension is presented and discussed in greater detail in [24]. as price makers. joint price/quantity bidding models. F. Coupling constraints (such as ramping. These water values. and diesel (see [13] for more details). H. The implementation of transmission constraints in the NE model proposed in this paper will be the topic of future research. C. we use the maximization of the spot price as an objective function in order to obtain the solution with the highest spot price in the case the NE is not unique.” one could think that they have very small operating costs. where is the but with an additional constraint: equilibrium spot price in the new problem. to find the first NE. IV. they will bid their variable operating costs and . The generation technologies for the remaining 28 plants include nuclear. However. we describe some possible extensions of the Nash-MILP solution approach to more complex models. the solution of each NE problem will be a new equilibrium. A. Their incorporation is beyond the scope of this paper. the incorporation of transmission and coupling constraints directly affects the computational effort of the model. more recently. some approaches were proposed by [22] and [23] to find and enumerate those equilibria. In this paper. It is worthy to note that our approach also allows the existence of multiple equilibria. each agent controls one generator. Multi-Plant Operation. it is possible that (16)–(18) has no feasible point. transmission network. Cesp (6900 MW). and hence. VOL. Therefore. the BE scheme applied to the NE problem can take advantage of any improvements of MILP solution techniques.Appendix B shows how to extend the NE model when agent has multiple generators. The remaining utilities will be modeled as price takers.” which are the opportunity costs of storing the energy and selling it in the future. Furnas (8200 MW). coal. V. It is also worthy to note that the division (discretization) of the bidding space can affect the existence of NE (or artificially eliminate potential NE). Because hydro plants use water. Computational Complexity Because all constraints are represented in an MILP environment. have the same role as the thermal plants’ variable costs and are used in the case studies as hydro’s operating costs. Moreover. MAY 2006 of greatest interest for regulators (it is the worst case for consumers) and for bidders (who tend to move toward the highest spot price equilibrium) [17]. the BE scheme can incorporate transmission network constraints (zonal and dc power flow). However. This procedure can be repeated until the current NE problem becomes infeasible. Nonexistence of Nash Equilibria A vector of strategies is an NE if and only if it satisfies (16)–(18).632 IEEE TRANSACTIONS ON POWER SYSTEMS. we use the equilibrium spot price as the objective function is the equiand (16)–(18) as the constraint set. including multi-plant operation costs/unit commitment. In this case. arranged in complex topologies over 12 main river basins. Hydro generation accounts for 85% of the installed capacity. 2. distributed in 110 hydro plants. Transmission Network and Coupling Constraints As shown in [13]. G. Joint Price/Quantity Bids The NE model can be extended to represent joint price/quantity bids. Study Parameters There are eleven main generation utilities in the Brazilian system. For example. and emission constraints) could also be included in the NE model.. including unit commitment. which are calculated by a stochastic hydrothermal scheduling model. A. Including Start-Up Costs In the previous sections. mostly related to O&M.

Study Results 1) NE Results: The NE model was solved with the objective function of maximizing spot price. in the case of hydro) of the price maker agents. We consider that all other agents and plants do not consider any unit commitment decisions. the equilibrium problem has 19 917 continuous variables and 14 281 constraints. 1). CESP. where Furnas. Cesp. 1. which makes a total of 17 binary variables. Fig. we used the fact that no agent would offer more energy than what would result from the least-cost dispatch. This means that the NE model (11)–(13) has binary variables in addition to the two binary variables that represent the Cesp’s unit commitment decisions for Jupia and I. 2) Discretization of Quantity Bids: Each bidding range was divided into 32 values (31 intervals). we ran a revenue maximization model—see [13]—as if Furnas. they have no start-up costs. use their variable operating costs.. In this case. 1 shows the corresponding dispatch cost (in Brazilian Reais2 per MWh) as a function of each utility’s total generation. Solteira. To obtain a lower bound . . i. D. plant type. and operating cost (water value. The remaining generators (price takers) will bid their available capacities and operating costs (water values. Solteira. CESP. and Duke. Our “base case” considers that Cesp makes unit commitment decisions (start-up costs as modeled in Appendix B) for two of its plants: Jupia and I. Dispatch cost function—Furnas. revenue is maximized by creating scarcity. Cesp’s cost function has two discontinuities (which are indicated in Fig. 1) Upper and Lower Bounds for Quantity Bids: The bidfor each price maker agent was established ding range as follows. 2Exchange rate: 1 US$=2. As discussed in Section III-E. For this reason. In addition to the binary variables. The stage is of one single hour. in a Cournot model. Cesp.. For the upper bound . in the case of hydro plants).BARROSO et al. the net revenue for the plants is higher—and the offered energy is smaller—than what can be obtained in the NE. and Duke were acting in coalition. Tables II and III show the resulting lower and upper bounds. this was done to find the equilibrium associated with Fig. and Duke bid quantities at a zero price. In this “base case.2 R$ (Brazilian Real). This was used to ensure the “internal” least-cost operation for the agents (see Appendix B for details) when determining its optimal bidding strategy. which represents a usual “peak” load scenario for the Brazilian system. AND DUKE GENERATORS TABLE II LOWER AND UPPER BOUNDS FOR QUANTITY BIDS TABLE III NE VERSUS COST-BASED BID LOAD level = 51 GWh C. decreasing the energy offered. Bidding Model We implemented the complete Nash–Cournot model described in Appendixes A and B. available capacities. as of March 2006.e.: NE IN STRATEGIC BIDDING: A BE APPROACH 633 TABLE I FURNAS. i. The reason is that. including the price makers. where all participants.e.” demand equals 51 GWh. but Cesp has unit commitment decision on two of its plants. Table I shows the capacity.

An Xpress MILP solver. was used to find the solution. Furnas. Elapsed time was 10 min (Pentium IV-HT with a 2. Cesp considers start-up costs decisions. CONCLUDING REMARKS AND FUTURE WORK This paper introduced the framework of a BE solution approach to the EPEC problem of NE in strategic bidding in short-term electricity markets. This was achieved through the reduction of the energy offered by these companies.. Again. including multi-plant operation costs. multiple equilibria were observed. i. Table IV compares the NE and cost-based spot prices for the different values of load level and presents the computational effort in calculating the NE for each case. we also ran the NE model for a set of different demand scenarios. as expected. the decrease in energy production was compensated by the increase in spot price. NO. this table also presents the equilibrium in case Cesp makes no unit commitment decisions. in which the demand was set to 25 GWh. The NE with no unit-commitment decisions (third column of Table III) is very similar to the NE with unit-commitment decisions. nonconvex. Since a natural question is whether the equilibrium would change in the absence of start-up costs. Table III compares the NE results—spot price. where all agents (including the price makers) offer their variable operating costs and available capacities. This is the behavior detected by the model. We see that the NE solution (first column of Table III) points toward a higher spot price than the cost-based one. As expected. unit commitment. However. VI. As expected. It is fairly intuitive that. 21. ranging from 2–10 min.” representing a peak load. the NE net revenue in the “base case” increased in spite of the reduced energy production. VOL. adopts the same equilibrium strategy. 2. 1 Mb of cache memory (Prescott) and 1 Gb of RAM memory). a least-cost dispatch and a revenue maximization model (assuming a coalitional behavior) were run to determine bounds to the price maker’s bids. 2) Sensitivity to Load Level: Aiming at verifying the effect of possible greater competition at lower load levels. The BE scheme is used to transform the nonlinear.e. and Duke have (jointly) market power. as a result of the withholding strategy for increasing spot prices. which uses a branch-and-bound algorithm (see [26] for details). These scenarios were chosen to have values between a “low” demand scenario. one resulting in the highest equilibrium price was chosen. and therefore. Cesp. Likewise. thus keeping the total amount offered by the price makers the same. Table V compares the energy production of the price maker agents in the NE and least-cost situations for two different situations: the “base case. Computational effort for these cases was fairly small. Cesp would offer less quantity in the situation where it considers start-up costs than in the situation where it ignores it. the energy production in the “base TABLE IV SPOT PRICES (R$/MWh): NE VERSUS LEAST COST TABLE V PRICE MAKERS GENERATION: NE VERSUS LEAST COST TABLE VI PRICE MAKERS NET REVENUE: NE VERSUS LEAST COST case” is smaller in the NE solution. there is an interesting opposite behavior relating Cesp and Duke. Cesp. and the equilibrium solution converges to the cost-based one. In our case study. which can be solved by commercially available computational systems. and their respective net revenues—with those of a cost-based solution. Bertrand. As expected. and . but Duke increased its offered quantity by the same amount Cesp contracted it (in comparison to the no-start-up-costs situation). market power is reduced as load decreases. resulting in higher net revenues for the price-maker agents. NE problem into a mixed integer linear problem. in which the demand was set to 55 GWh. in this section. Table VI summarizes the net revenues of these companies for both NE and least-cost for each case simulated. The BE scheme is applicable to Cournot. and Duke. and an unusually high demand scenario. Consequently. for example.634 IEEE TRANSACTIONS ON POWER SYSTEMS. showing that Furnas. MAY 2006 the highest spot price in case there are multiple equilibria solutions. in the equilibrium. The remaining simulation parameters were the same as before. Finally.8-GHz processor. total generation of Furnas. or joint price/quantity bidding models. the spot price is the same in both cases. and the “low load” case.

and bids in other markets. we have the following MILP constraints: (A. We now apply the transformations (19)–(24) to the product of variables of (5) and (11) to arrive at the final MILP formulation. and 3) the solution of the resulting MILP constraint set by commercial solvers. In this sense. 1) BE Model of the LHS Net Revenue: Applying the BE scheme to the LHS of the NE conditions (16)–(18). B. the NE is given by any feasible bidding strategy that meets simultaneously constraints (16)–(18). Finally. which is already being investigated by the authors.11) (A. Case studies presented in this paper had fairly small computational time but some important constraints.2)–(A. the fact that the number of continuous variables and constraints is large suggests the possibility of using relaxation strategies in the solution of the NE model (16)–(18) and searching for the optimal NE solution through successive approximations of the relaxed optimization problems. which contain nonlinearities.12) (A. we need to apply the BE scheme to each of them. the obtainment of feasibility-cuts and the use of branch-and-cut strategies for the solution of the integer problems may be applied and should be evaluated as well.9) (A.7) Note that the BE is only applied to (11).6) (A.2)–(A. which is now rewritten as (A. The nonlinearities appear in the objective function (5) and in constraint (11).5) (A. .10) (ED complementarity conditions) in order to define . BE of Individual Profit-Maximization Problems As mentioned in Section II.8) (A.: NE IN STRATEGIC BIDDING: A BE APPROACH 635 the enumeration of multiple Nash equilibria. and system size was small. coupling constraints. Each of these steps will be discussed next. On the other hand.13) As seen previously.15) (A. These aspects can increase the computational effort of the MILP algorithms. the agent ’s optimal bidding problem is the MPEC problem formed by the maximization of (5) subject to constraints (6)–(11). The approach was illustrated in case studies with configurations from the Brazilian system.2) 3All variables with superscript e are results when all agents bid at the NE. The objective function (5) and constraint (6) are given by (A.11)–(A. As seen in Section III. subject to constraints (A. which contain nonlinearities.7). Moreover. the solution scheme can take advantage of recent improvements of MILP solution techniques. Therefore. However. we still have to add to (A.1). BE Model of the NE As seen in Section III.10) Agent ’s bidding problem (5)–(11) then becomes the maximization of (A. C. the solution approach comprises the following: 1) apply the BE scheme to transform the nonlinear terms into MILP constraints in the individual profit-maximization problem. For example. Introduction and Objectives The objective of this Appendix is to present the final NashMILP model after all BE transformations are applied. 2) obtain the MILP model of the NE model by applying the BE scheme to both the LHS and RHS of (16)–(18).4) (A. the resulting spot price when all agents bid at the equilibrium. were neglected. The authors intend to incorporate these and other extensions of the NE model in future papers. the authors intend to investigate alternative solution approaches to the NE model that would alleviate the computational effort in large case studies. This is presented in 3 (A. such as transmission network.13) a constraint set similar to (A. the NE is given by the bidding strategy that meets simultaneously constraints (16)–(18).3) (A.BARROSO et al.10) after the BE scheme is applied. we arrive at (A. Therefore. it may eventually present the computational drawbacks that follow from limitations of the same integer programming algorithms.1) Equations (7)–(11)—ED complementary conditions—can be written as (A. The LHS and RHS of this constraint set depend on individual profit-maximization problems such as (5)–(11). the LHS and RHS of this constraint set depend on individual profit-maximization problems. APPENDIX A BE TRANSFORMATION/NE A. Because all constraints of the proposed approach are represented in an MILP environment.14) (A. which will be done next.

29) (A. This does not mean that the BE scheme is not used in the RHS model. . In this Appendix.1) (B.27)–(A. the products are decision variables (which makes the while in the LHS. This is shown in (A.2) the LHS case. products nonlinear). multiplier.33) is the th price taker generator constraint simplex Here.22) and (A. Moreover.14)–(A.25) (A.4) . are linear expressions. and adding the constraint sets (A. In this case. Therefore. the bid amount each energy allocation .28) (A.13) and (A.26).11)–(A.26) into the LHS and RHS of (16)–(18). where is the unit variable agent as a linear function is the energy production allooperating cost ($/MWh).636 IEEE TRANSACTIONS ON POWER SYSTEMS.33).17) (A.16) (A. we also need to consider the ED complementarity conditions when agent bids his th option. respectively.18) (A. The final BE formulation of each RHS of the NE conditions has (A. for model is zero. we represented the operating cost of . The general case is discussed in [24]. Thus. the BE scheme does not appear explicitly in the objective function of the RHS model (A. Final MILP Formulation The final NE conditions are obtained by replacing (A.14)–(A. and is the generation of price taker agent . results in (A.33). with different operating costs (including unit commitment).27)–(A. we discuss how to extend this model by assuming that agent controls a set of generators.21) (A. which provide the “physical support” to its price/quantity bids.30) subject to APPENDIX B GENERAL OPERATING COST FUNCTIONS A.32) (A. resulting from the ED resulting from these bids. Applying (A. values. Thus. and and for Note that the equilibrium bid variables in each constraint (A.27)–(A.20) (A. we enuare known merate the bidding options of each agent.27) (A.27)–(A. because there is a separate ED in the .26) and (A.11)–(A. that is. The reason is that in the RHS.33) are the same as in the LHS constraint set (A. In the previous sections. and the remaining price maker agents stay with the equilibrium bids . D. there is only one ED and one set of constraints.23) is the spot price from the ED where agent bids his where th option . Overview (A. 21. 4In (B. there are different primal-dual conRHS for each bid straint sets.19) (A. NO.26) In contrast to the LHS model (A. We show how to ensure the least-cost operation in the Cournot model.24)–(A.24)–(A.31) (A.22) 2) BE Model of the RHS Net Revenue: We now model the RHS of (16)–(18).24)–(A.4 For . (A.23) to each RHS in (16)–(18) results in (A. Applying the previous procedure.24) (A. where generators bid quantities only. B. there is only one set of equilibrium bids fE g. Ensuring Least-Cost Operation: Cournot Model Because the bid price of price maker agent in the Cournot is fully dispatched. MAY 2006 (A. agent must decide his least-cost production schedule that meets this target.3) (B.33) as constraint set. 2.13). and cated to agent in the economic dispatch. The resulting MILP model of the EPEC problem that calculates the NE can be solved by commercially available optimization packages. the operating cost becomes a general function (B. VOL.22).

T. 2000. Berry. [20] C. no. pp. p.4) represent. no. no. [16] B. IEEE Summer Meeting. Borenstein. 2004. 180–188. pp.. 2004.9) into the RHS (A. A. 15. 17. vol. J. Hiskens. R. Aug. A. Otero-Novas. Bunn. Res. “Oligopolistic equilibrium analysis for electricity markets: A nonlinear complementarity approach. Cambridge.1)–(B. Helman. Li. is known beforehand. degree in mathematics and the M. 4. Overbye.” Oper. 1.8) is the energy produced by the th generator of agent where when all agents bid the equilibrium values (MWh). Campodónico. Jul. New York: Wiley. and I. pp. Arroyo.. pp. [10] A. Hunt. pp. Pereira. vol. PWP-059R. Europe.2) makes total generation equal to the allocated energy. 2002. 1999. Kelman. “Analyzing strategic bidding behavior in transmission networks. Fampa. Making Competition Work in Electricity. Aug. 4. [19] R. He has been a speaker on power system planning and operations issues in Latin America. Nov. “Calculating equilibria in imperfectly competitive power markets: An MPEC approach. Batlle. are added to the LHS set (A. IEEE Winter Meeting. [3] A.6) (B. Knittel. and J. 638–645. no.S. no. of (16)–(18) and adding (B. . degree in optimization from Federal University of Rio de Janeiro (UFRJ). Correia. Hobbs. 2003.. S. 590–596. vol. and is a binary variable that represents the start-up decision when all agents bid the equilibrium values. and J. 19.. “Searching for noncooperative equilibria in centralized electricity markets.5 is the capacity cost of the th generator of agent ($/MWh). 19. 4. 5Note that these generators are not represented in the agent’s economic dispatch. 2002. [2] D. 51.: NE IN STRATEGIC BIDDING: A BE APPROACH 637 where indexes the “real” generators underlying agent ’s bid is the variable operating ( is the number of generators). no. no. [6] I. vol. 1.psrinc. May 2000.” in Proc. 2000. 7.” Util. [26] X-Press MP. Ventosa. pp. and market power analysis in energy markets. “An individual welfare maximization algorithm for electricity markets. 2001. [12] W. W. Rio de Janeiro. no. The constraints (B. [25] M.” IEEE Trans. 80–93. Fudenberg and J. this also means that RHS operating cost for that agent can also be pre-calculated as (B. 139–158.26). 2004. and “A simulation model for a competitive generation market. [7] B.22).D. R. 354–359. vol. [8] B. and A. 638–645. Metzler. vol. 2003. “Modeling competition in electric energy markets by equilibrium constraints. vol. J. we arrive at the final expression (B. Power Syst. C.14)–(A. Aug. similar to (B. vol. [Online] Available: http://www.” IEEE Trans. and J.. “Strategic bidding in competitive electricity markets: A literature survey. no. Feb. Apr. 1. where each Because the values are pre-calculated.” IEEE Trans. 3. L.. Granville.10) into the LHS and RHS. pp. “Discussion of “Hydrothermal Market Simulator Using Game Theory: Assessment of Market Power”. 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degree in applied mathematics. Previously.D. 2.Sc. Brazil. He is currently working toward the Ph.638 IEEE TRANSACTIONS ON POWER SYSTEMS.and hydrothermal scheduling. and he is currently engaged in regulatory studies and the development of new methodologies and tools for risk management in competitive markets. COPPE at the Federal University of Rio de Janeiro. degree in mathematics from Pontificia Universidade Catolica do Rio de Janeiro. University of Iowa. in 2000 and is currently engaged in risk management for energy markets and software development for power systems. Ames. Her research interests include optimization and mathematical programming. C. CA. he was a Project Manager at EPRI’s PSPO program and Rsearch Cordinator at Cepel. in 1978. Brazil. reliability evaluation. where he developed methodologies and software for expansion planning. degree in mathematics from Instituto de Matematica Pura e Aplicada (IMPA) in 2005. Rio de Janeiro. Princeton. Dr. degree in electrical engineering from Pontificia Universidade Catolica do Rio de Janeiro and the M. NO. Rio de Janeiro.D. She is a Professor with the Department of Computer Science. Rio de Janeiro.Sc. .Sc. Marcia H. She has also been an Invited Researcher at the Department of Management Sciences. Stanford. and the Ph. VOL. He worked at PSR from 2003 to 2005 on strategic bidding in electric power markets. Mario V. Pereira was one of the recipients of the Franz Edelman Award for Management Science Achievement. with special interest in interior point methods and continuous relaxations for integer programming problems. granted by ORSA/TIMS for his work on stochastic optimization applied to hydro scheduling. and a Ph.. degree in economics at Princeton University. Fampa received the Ph. He is the President of PSR. He joined PSR. Brazil. degree in operations research from Stanford University. Rio de Janeiro.D. degree in optimization from COPPE/Federal University of Rio de Janeiro in 1986.D. degree in optimization from COPPE/Federal University of Rio de Janeiro. Sérgio Granville received the B. Pereira (M’01) received the B. degree in electrical engineering from Pontificia Universidade Catolica do Rio de Janeiro. MAY 2006 Rafael Dix Carneiro received the B. Previously. developing methodologies and software for system operation optimization and expansion planning. the M. 21. Institute of Mathematics.Sc.Sc. NJ. he was a Visiting Scholar at Stanford University and a Researcher Coordinator at CEPEL.