IEEE TRANSACTIONS ON POWER SYSTEMS, VOL. 18, NO.
1, FEBRUARY 2003
Hydrothermal Market Simulator Using Game Theory:
Assessment of Market Power
Jorge Villar and Hugh Rudnick, Fellow, IEEE
Abstract—The aim of this work is to build a model able to sim-
ulate a hydrothermal electric power market based on simple bids
to a power exchange. The model studies the behavior of different
market agents in a short-term horizon and delivers information
about spot prices, use of water, and other relevant variables. Ini-
tially, a thermoelectric market is simulated through a static model
based on Cournot concepts. The addition of hydroelectric power
stations and time dependencies is made later, using a dynamic pro-
gramming algorithm to build a dynamic model. In each stage and
state of the dynamic programming, a Nash–Cournot equilibrium
is determined to assess the behavior of the thermoelectric power
stations (static model). Different strategies that firms can follow
and the consequences of each one of them are analyzed. Market
power mitigation effects of physical and financial bilateral con-
tracts are also investigated. A case study with data on the Chilean
power system is presented and analyzed.
Index Terms—Cournot, electric market, game theory, market
power, oligopoly, power sector deregulation.
I. INTRODUCTION
T HROUGHOUT the world, the power industry is in the
midst of important changes in the structure of its markets
and their regulation. The primary trend of this restructuring
is to promote competition, mainly in the generation sector,
liberalizing those markets, and allowing access to private
agents. In this manner, the traditional large state-owned verti-
cally integrated companies are being segmented and different
legal organizations are created to try to regulate the operation
of these new competitive generation markets. Chile was a
pioneer country in Latin America and the world to make these
regulatory changes in 1982. Several other Latin American
countries followed close after. With no paradigm to rely on,
the regulatory changes were conservative in aiming at creating
competition under a centralized dispatch scheme. Audited
cost was used, emulating what would be a perfect competition
condition under marginal costs. However, in recent years,
resultant prices are being questioned as not reflecting real
market conditions, thus slowing new investments, weakening
adequacy of supply, and limiting the entry of new competitors.
Criticism had arisen on the centralized poolcos, formulating
the need for a second stage of reform, establishing highly
flexible mechanisms of decentralized exchanges, and achieving
real market mechanisms, with wholesale and retail compe-
tition. While the second-generation concepts are not unique
Manuscript received April 2, 2002; revised June 7, 2002. This work was sup-
ported by Fondecyt Project 1020801.
The authors are with the Department of Electrical Engineering, Pontificia
Universidad Católica de Chile, Santiago, Chile (e-mail: h.rudnick@ieee.org).
Digital Object Identifier 10.1109/TPWRS.2002.807061
0885-8950/03$17.00 © 2003 IEEE
91
to California, countries such as Norway, the U.K., and Spain
have made similar reforms, the California model arose as the
paradigm in the region. The defined objective was, within the
California paradigm, to replace the centralized pools and to
force “perfect” competition with the laissez faire model of the
power exchange, coupled to an independent system operator
that dispatches essentially based on long-term physical bilateral
contracts plus short-term unrestricted bids.
Under this context, it is interesting to analyze an operating
scheme similar to the one formulated in California, based on
physical bilateral contracts where surpluses are traded in a
power exchange with free price bids. There are many questions
and challenges this change could bring to the Latin American
generation markets, so it becomes of utmost importance to
predict its behavior. This is more of a challenge given the
important hydrological contribution in these markets, unlike
the markets in North America and Europe. This is precisely
the fundamental aim of this work, to try to predict the conse-
quences of the implementation of this new market scheme in
a hydrothermal market, the possible strategic behavior of its
main agents and the effect of possible regulatory measures.
Researchers have recently performed similar studies, adapted
to the specific conditions determined for each system, most of
which analyze thermoelectric systems. Borenstein et al. present
a simulation method using game theory to measure the market
power in a thermoelectric system [1]. Otero–Novas et al. de-
velop an iterative simulation algorithm that can model different
strategic behaviors for a hydrothermal electric system [2] and
[3], but it assumes the implementation of a series of activity
rules that limit its general application. Barroso et al. introduce
a hydrothermal simulation model primarily used to measure
market power [4] and [5], but it considers hydroelectric power
units as the only ones being able to act strategically.
The main contributions of this research compared to the
works mentioned before are: i) the model simulates a power
market with thermoelectric and hydroelectric power stations
and not only with thermoelectric ones as most of the research
on the subject does; ii) in this generation market, both hydro-
electric and thermoelectric power stations can act strategically,
different from [4] and [5], where the most important stations,
and thus, the ones that can act strategically, are hydroelectric
power stations.
The model presented herein simulates the behavior of a hy-
drothermal electric generation market based on a power ex-
change with free bid prices. This simulation is made for different
competitive strategies, both for thermoelectric and hydroelectric
power units. For that purpose, it calculates the prices offered and
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the production of all the units and firms in the system. Its pur-
pose is to analyze the consequences of different strategies to be
adopted by generators and the effect of possible regulatory mea-
sures on their behavior.
Simple bids by generating units are considered in the model.
Technical limitations must be considered within the units’
strategies. In addition, these bids are assumed to be hourly bids,
that is, each generating unit can offer a different bid each hour
of the day. The hourly character of the bids heavily limits the
modeling horizon where, in general, the analysis will be made
in one day, divided in 24 h (24 bids).
The effect of bilateral contracts on the market behavior is an-
alyzed in later sections. In addition, midterm water usage de-
cisions are not included because of the short period studied,
but the effects of the different water usage decisions are also
analyzed.
II. FORMULATION OF THE MODEL
The methodology used to develop an electric market opera-
tion simulator is based on the Cournot model. This is a basic
model to study all types of oligopoly markets that has been
broadly used in the works made in this area (for example, in
[1]–[5]).
The Cournot model does not represent exactly the way in
which a power exchange operates, but it is a very useful tool to
model the strategic behavior of the market agents. In this way,
the results obtained with this model represent an approximation
of the behavior of a power exchange with free bids.
This model assumes that the firms compete based on quantity
strategies. Each firm chooses the quantity to produce, to offer,
assuming that the production of the rest of the strategic firms
in the market is constant and known. In this manner, a game
is started, where each firm chooses to produce the level that
maximizes its benefits, under the assumption that the production
of the other firms will not change. The solution to this game is a
Nash equilibrium, where no firm can benefit when the amount
offered is unilaterally changed, given the amounts offered by the
rest of the strategic firms.
Additionally, the possibility of having small firms not acting
strategically is recognized. Thus, very small firms will be mod-
eled as price takers and only major firms will be modeled as
Cournot strategic competitors.
There are other models that implement the strategic behavior
in firms and should also be considered.
• Bertrand model: In this model firms compete based on
prices. However, its application is limited in electric mar-
kets [1].
• Bid functions model: In this model, equilibrium is
achieved from cost/quantity bid curves created by the
firms. As the Cournot model, its application is common
in electric markets. It has the advantage of better repre-
senting the way in which firms really make their bids, but
it is not as flexible as the Cournot model, when consid-
ering other aspects of electric markets such as contracts,
financial derivatives, and technical limits, among others.
In addition, Cournot’s equilibrium is much easier to
IEEE TRANSACTIONS ON POWER SYSTEMS, VOL. 18, NO. 1, FEBRUARY 2003
calculate than the bid functions model equilibrium, and it
becomes its “upper bound.”
A. Demand
Initially, the demand model covers one day, divided in 24
chronological hourly blocks; so block 1 goes from 0:00 to 1:00
and block 2 goes from 1:00 to 2:00, and so on. A demand curve
for each one of these blocks is determined. Further on, it is pos-
sible to generalize the model taking longer demand blocks, for
example, one day, but always based on short-term study hori-
zons, for example, a couple of weeks or a month.
To simplify the model implementation, linear demand curves
will be used
(1)
where is the energy price; is the electric demand at that
price; and and are the constants that determine the demand
curve.
It is well known that the demand for electric power is quite
inelastic, especially in the short term. Thus, low values for con-
stant must be ensured to model a low elasticity.
B. Strategic and Price Taker Firms
In general, firms can be classified in two categories.
• Very small firms that would not be able to exercise market
power, they would not act strategically and would act as
price takers. These firms are modeled simply producing
up to the level at which their marginal cost is equal to the
market price.
• Firms that have the potential to exercise market power, that
is to say, the power to influence unilaterally the market
price. They are modeled as strategic players or Cournot
players, and they would behave as the model establishes,
each firm choosing the quantity to be produced (to bid)
that maximizes its profits, taking as given the output pro-
duced by all other strategic firms.
C. Modeling of Price Taker Firms
These firms offer the entire quantity they can produce at a
marginal cost that is equal to the spot price. Thus, it is possible
to obtain the aggregate bid function of these firms by simply
using the quantity offered for each one of them for each price
level. In this manner, the accumulated bids belonging to price
taker firms can be written as
(2)
where is the quantity offered by the taker firm at price
.
D. Residual Demand for Strategic Firms
The residual demand for strategic firms is obtained by sub-
tracting, for each price level , the original demand minus
the accumulated bids of the price taker firms . Thus, the
VILLAR AND RUDNICK: HYDROTHERMAL MARKET SIMULATOR USING GAME THEORY
residual demand curve that is faced by all the Cournot
players is the following:
(3)
E. Modeling of Strategic Firms
Three possible strategies to be followed by these types of
firms were assumed. They are as follows.
• Competitively acting units: In this case, each generating
unit acts in the same manner as a price taker firm (i.e.,
simply offering an energy production up to the level in
which its marginal cost is equal to the market price). This
strategy aims at representing the ideal scenario, a compar-
ative point, and it will be called “competitive strategy.”
• Units that maximize their individual benefits: In this case,
each generating unit acts strategically, according to the
Cournot model, trying to maximize its individual benefit.
This strategy represents a hypothetical scenario in which
all the units belong to different firms (i.e., a low ownership
concentration scenario). This strategy will be called “game
by units.”
• Firms that maximize their benefits: In this case, the gener-
ating units that belong to a same firm act jointly to maxi-
mize the total benefits of the whole firm, according to the
Cournot model. This strategy represents the most probable
scenario, being the best economic choice for the firms.
This strategy will be called “game by firms.”
F. Static and Dynamic Models
The complexity of building a model that simulates the be-
havior of both thermoelectric and hydroelectric power stations
was faced through a sequential solution. Initially, a time-decou-
pled model is presented (i.e., a static model). This model simu-
lates the behavior of power plants in an open-bid-based market
in a power exchange, through the Cournot model. Later, a dy-
namic model that adds up the time dimension of the problem is
developed. It recognizes the time linkage of the decisions made
by hydroelectric power units. In addition, it is possible to de-
termine the behavior of thermoelectric units through the static
model for each stage of the process.
III. STATIC MODEL
A static model is one that does not model the time dependen-
cies of decisions made by the firms. This is a very restrictive
assumption for electric generation markets, as decisions made
by the power units currently affect future possibilities. This de-
pendence is different depending if they are thermoelectric or hy-
droelectric power units.
• In thermoelectric units, this dependence shows up in the
startup costs, load taking, and load shedding speed, min-
imum shutdown and operation times, etc.
• In hydroelectric power units (with reservoir capacity),
time dependence is even more essential, as decisions on
the use of water will strongly influence future generation
capacities. In addition, hydrological uncertainty is a
problem that adds up another dimension to the model.
93
Consequently, a static model can reasonably represent ther-
moelectric units, but it is an extreme simplification if one wants
to represent the behavior of hydroelectric power units. There-
fore, only thermoelectric units will be simulated with the static
model.
This model can be used with any kind of demand function,
but to simplify the model resolution, the demand function used
is a linear one, as shown in (1).
A. Competitive Strategy
In this strategy, all generating units act in the same manner as
a price taker firm. That is to say, each unit takes prices as a data
point, upon which it has no possibility of influencing it.
Thus, each generating unit faces the following optimization
problem:
Profit
(4)
where is the given price; is the quantity produced (offered)
by unit ; is the cost incurred by unit to produce ; is
a binary decision variable (1 if unit produces, 0 if it does not
produce); and and are the operation limits for
the unit.
To find the solution to this problem, it is possible to sim-
plify at first assuming that . Then, the problem is solved
without integer variables, and eventually, if the resulting benefit
is less than zero, it is concluded that , and thus, .
Differentiating the expression inside the brackets in (4) with
respect to and making it equal to zero, we have
(5)
(6)
Summing up, each unit offers a quantity such that the mar-
ginal cost to produce it is equal to the price observed in the
market. Then, if this quantity exceeds the minimum or max-
imum generation limits for the unit, it must be corrected and
taken to the respective bound. Eventually, if the resulting ben-
efit is negative, the unit decides not to generate.
In this manner, it is possible to determine the bid of each
one of the thermoelectric units. Later, the accumulated bids are
determined and they are intersected with the demand in
(1) to obtain the clearing price and the quantity that is really
produced by each unit.
B. Game by Units Strategy
In this case, each generating unit acts strategically, according
to the Cournot model, trying to maximize its individual benefit.
Therefore, each generating unit faces the following optimization
problem:
Profit
(7)
This equation is similar to (4) for a competitive strategy, but the
difference is that in this case the price is not given, but it depends
94 IEEE TRANSACTIONS ON POWER SYSTEMS, VOL. 18, NO. 1, FEBRUARY 2003

To reach equilibrium, the elasticity must be different to zero and

the producers must be able to supply all of the demand.
The optimization problem for each unit is transformed into

Profit

(9)

where represents the residual demand observed by the

strategic thermoelectric unit and it consists of the residual de-
mand for all strategic units minus the generation, known,
and constant, of the rest of the strategic units.
The problem represented by (9) is a decoupled problem and
can be solved separately for each generating unit as presented in
the iterative process. As it happens in the competitive strategy,
the problem can be simplified initially assuming that ,
then it is solved without integer variables and, eventually, if the
resulting benefit is less than zero, it is concluded that ,
and thus, .

C. Game by Firms Strategy

In this case, firms try to maximize their total benefits. That is
to say, the group of units belonging to a same firm jointly acts
strategically, according to the Cournot model, trying to maxi-
mize the total benefits of the firm. Thus, each firm faces the
following optimization problem:

Profit

Fig. 1. Game by units solution algorithm.

on the quantity produced . That is to say, the possibility of the

generating unit to influence the price unilaterally is recognized.
The equation that correlates the amounts produced per unit (10)
with price is the residual demand calculated in (3). Then, we
This equation has a structure similar to the one shown in (7)
have that
for the game by units strategy. However, in this case, a second
dimension is added to each variable: belonging to a firm. In
this manner, variable represents the quantity produced or
(8) offered by unit from firm , and in the same manner, variables
, , and are represented.
Here, we face an additional difficulty, because this equation
Once again, the possibility of the firm to exercise market
for demand establishes a relationship for all the units’ amounts,
power, that is to say, of affecting the prices unilaterally, is rec-
so it is not possible to solve the maximization problems in a de-
ognized. The equation shows that price depends on , which
coupled way. Additionally, this relationship cannot be inverted,
represents the total generation level of firm .
due to , so an analytic expression for the price cannot be
As in the case of the game by units, the residual demand faced
found. The proposed solution is to solve the problem iteratively,
by strategic firms presents a single relationship between prices
as shown in Fig. 1
and all of the amounts generated by the firms, so it is not possible
In this manner, each generating unit determines its optimum
to solve the problem stated in (10) in a decoupled way for each
generation level in a decoupled way, assuming that the genera-
firm. In this case, it is possible to write down this relationship
tion of the rest of the units is constant and known. This assump-
in the following manner:
tion is only part of the iterative procedure, in order to find a so-
lution and it does not mean that in the model, the units need to
know the production of their competitors. The process repeats
itself until no unit has incentives to change its generation level,
which represents, by definition, a Nash–Cournot equilibrium. (11)
VILLAR AND RUDNICK: HYDROTHERMAL MARKET SIMULATOR USING GAME THEORY
Fig. 2. Game by firms resolution algorithm.
The procedure proposed to solve this problem is also similar
to the one of the game by units strategy (i.e., the solution is ob-
tained iteratively in order to decouple the problems and solve
them separately for each firm). In this manner, each firm deter-
mines its optimum generation level knowing the generation of
the rest of the firms and assuming it remains unchanged. This is
done repeatedly until convergence, which represents the Nash
equilibrium. This process can be seen in Fig. 2.
Thus, the optimization problem faced by each firm can be
written as
Profit
(12)
where represents the residual demand observed by
strategic firm and consists of the residual demand for all
95
strategic firms minus the generation, known, and
constant, of the rest of the strategic firms.
IV. DYNAMIC MODEL
The following step to simulate a hydrothermal generation
market is the addition of hydroelectric power units. For that pur-
pose, it is necessary to consider the time dependence of their
decisions, especially decisions on the use of water. Thus, a dy-
namic model must be built.
To add the time dimension to the model, expressed in water
usage restrictions, and to be able to simulate the behavior of
hydroelectric power units in the power market, a dynamic pro-
gramming algorithm is used. This methodology is broadly used
in the dispatch of electric systems (unit commitment of thermal
systems, hydrothermal scheduling problem, etc.).
To represent a hydroelectric power unit (or a group of units
belonging to the same firm), backward dynamic programming
is used. The states of dynamic programming will be the water
reservoir levels for the unit (or firm). However, the amount of
water available to be used during the study horizon (generally
one day) will be a fixed quantity; that amount is assumed to
be the result of a long-term use of water programming. Water
reservoir levels are modeled as states only to evaluate the hourly
water usage in the study horizon, not to evaluate the variation of
the reservation level itself.
To model various units from different firms, an iterative
process is made, where each unit determines its generation
through an independent dynamic programming and the process
is repeated until convergence is achieved [6].
On the other hand, thermal units are represented through the
static model (i.e., there is no time dependence considered in their
decisions). This static model is used to represent the behavior of
thermoelectric units in each stage of the dynamic programming
and for each possible state of water storage.
A. Competitive Strategy
Following this strategy, the behavior of thermal units is the
one seen in a perfectly competitive market, that is to say, the
units offer to make the price equal to their marginal cost. In the
case of hydroelectric power units, this methodology is not valid,
as its marginal cost is zero, and thus, it is necessary to determine
another action mechanism.
As the objective of the competitive strategy is to represent an
“ideal market,” we shall assume that hydroelectric power units
make their generation decisions in order to minimize the total
generation costs throughout the study horizon. This problem is
not equivalent to problem (4) of the static model, but it is also
a way to represent an “ideal market,” which is the purpose of
the competitive strategy. Thus, the objective function of a hy-
droelectric unit is very similar to the one observed in the case
of hydrothermal dispatch at a minimum cost. In this manner,
dynamic programming has the objective of minimizing the im-
mediate generation cost plus the expected future cost.
To solve the backward dynamic programming, the following
steps are followed.
• For each stage (generally 1-h stages), a finite set of
storage states for the hydroelectric power unit is defined.
96
• The algorithm begins in the last stage . For each state,
the use of water decision is made, choosing the one that
originates the lowest immediate cost. In this case, the fu-
ture cost is nil, as the amount of water available to be used
is fixed. The immediate cost is computed through multiple
runs of the static model.
• Next, the former stage starts, and for each state, the water
usage originating the lowest total cost is determined, in
this case, total cost includes immediate cost and expected
future cost. Again, to determine the immediate cost, mul-
tiple static simulations are made for each possible storage
state.
• In this manner, the algorithm continues going back up to
the first stage where the final expected minimum cost is
determined for the whole study horizon (generally 1 day).
Mathematically, the dynamic programming algorithm can be
presented in the following manner:
(13)
where are the storage states at the beginning of stage ;
are the storage states at the end of stage ; is the future
expected cost at the beginning of stage for storage state ;
and is the immediate cost in stage if there
is a transition from a storage state to a state . (15)
The immediate cost is calculated through the static model,
simply adding up the costs incurred by all thermoelectric units
needed to satisfy the portion of demand that is not served by
hydroelectric power generation.
B. Game by Units Strategy
In this case, hydro units act in the same manner as thermal
units in the static model (i.e., trying to maximize their individual
benefits, without considering the remaining units belonging to
the same firm).
Therefore, the objective function of each unit in the dynamic
programming will be to maximize its immediate benefit plus its
future expected benefit. The methodology to solve the dynamic
programming is similar to the one used in the former strategy,
with the difference that benefits are being maximized instead of
minimizing the total cost.
The static model is used to determine the behavior of ther-
moelectric units in each one of the programming stages and for
each possible use of water decision made by the hydroelectric
power unit.
Mathematically, the dynamic programming algorithm can be
presented in the following manner:
(14)
where are the storage states at the beginning of stage ;
are the storage states at the end of stage ; is the future
expected benefit at the beginning of stage for the storage state
; and is the immediate benefit in stage
if there is a transition from a storage state to a state . different strategies. The demand function used is a linear one, as
The immediate benefit is the product between the gener-
ated hydroelectric power and the market-clearing price under
IEEE TRANSACTIONS ON POWER SYSTEMS, VOL. 18, NO. 1, FEBRUARY 2003
each situation, the latter being determined by the respective
static model.
C. Game by Firms Strategy
In this case, hydroelectric units make strategic decisions to
maximize the total benefits of the firm to which they belong, also
including the benefit obtained by thermoelectric units belonging
to their firm.
Therefore, the objective function of firms with hydroelectric
power units in dynamic programming will be to maximize the
immediate benefit of the entire firm plus the expected future
benefit obtained by that firm. The methodology used to solve
the dynamic programming is similar to the former one, but in
this case, the benefits of the thermoelectric units of the same
firm are added to the objective function.
The mathematical presentation of the algorithm is identical to
(14) and the only difference is the calculation of the immediate
benefit . In this case, the calculation of must be made
considering the benefits for the hydroelectric power unit and
the thermoelectric units belonging to the same firm. Then, for
firm, we have that
In this manner, the immediate benefit is the addition of
the hydro immediate benefit plus the immediate thermal
benefit . The clearing price and the amounts produced by
the thermoelectric units of firm result from the respective
static model.
V. APPLICATION TO A REAL SYSTEM
The language chosen to write the model was Matlab, since it
is easier to understand and adapt, and also because it has many
built-in graphical and mathematical functions that facilitate its
use.
The model was applied to the Chilean main electric market,
the central interconnected system (SIC). This is a hydrothermal
system that is predominantly hydroelectric. Only reservoir hy-
droelectric power stations are considered as such; run-of-river
power stations are not modeled and their generation is simply
subtracted from the demand.
In this market, three major firms are observed to have the po-
tential to exercise market power. Therefore, they will be consid-
ered as strategic firms. All three firms have thermal units, but
only two have reservoir hydro units. Table I shows the installed
power and number of units (and reservoir ones) for these firms
as well as for minor third parties.
For this simulation, a time horizon of one day divided in 24
hourly blocks was considered and the three possible strategies
were studied. In this manner, it is possible to see the behavior of
the different agents of a power exchange with hourly bids under
shown in (1), and real data for year 2000 are used to determine
the value of constants and for each hour.
VILLAR AND RUDNICK: HYDROTHERMAL MARKET SIMULATOR USING GAME THEORY
TABLE I
INSTALLED POWER AND UNITS IN THE SIC (2001)
Fig. 3. Clearing prices—all strategies.
Fig. 4. Total hydro generation—all strategies.
The resulting clearing prices are shown in Fig. 3. It shows
an important overprice, both in the game by units strategy and
in the game by firms strategy, especially in the latter one. It is
also possible to conclude from the figure that overprice is much
higher in the peak demand hours.
Fig. 4 shows the stored water usage to generate electricity
throughout the day for different strategies. It clearly shows that
in the case of the game by firms, less water is used in higher
demand hours, favoring the increase in clearing prices.
Tables II and III show a comparison between the profits ob-
tained by each firm under a competitive strategy and under a
game by firms strategy. Table II shows the profits obtained for
reservoir hydro generation, firms B and C strongly increase their
revenue due to the increase of prices. Table III shows the profits
obtained for thermoelectric generation, firms A and B increase
their revenue more than firm C, due to their higher number of
thermoelectric units.
VI. MITIGATION OF MARKET POWER
Given the negative effects of the exercise of market power for
society, regulators often assess the use of regulatory measures
and other nonregulatory elements that may mitigate that power.
97
TABLE II
PROFIT OF RESERVOIR HYDRO GENERATION
TABLE III
PROFIT OF THERMO GENERATION
In this work, we will analyze the impact of physical and finan-
cial bilateral contracts between generators and loads in mini-
mizing market power.
One of the main obstacles seen in the practical implementa-
tion of market-oriented schemes in hydrothermal systems is the
uncertainty of sales returns from the wholesale market (power
exchange) in the mid and long term. To face the high volatility
that clearing prices show in the long term, generators have in-
centives to sign bilateral contracts. Below, we will analyze the
short-term effect of these types of contracts.
A. Modeling Bilateral Contracts
The addition of physical bilateral contracts to the simula-
tion model is made indirectly. Therefore, it is not necessary to
modify its mathematical formulation, only the input data to the
system vary, namely, the supply and demand vary. Specifically,
the changes in input data made to add a certain level of contracts
to the model are: drop in the demand seen by the exchange in
each stage, drop in the thermal and hydro supply in each stage,
and drop in hydroelectric power (water) available for the study
horizon.
On the other hand, the addition of financial bilateral contracts
to the model implies a slight modification to its mathematical
formulation. In this case, the objective functions of the power
units must add the financial benefits obtained due to the differ-
ence between the contract price and the exchange price. Specif-
ically, (4), (7), and (10) must add the following term:
(16)
where is the power contracted by unit and is the con-
tracted price.
B. Results
The model again was applied to the SIC, but considering dif-
ferent levels of both physical and financial contracting. In both
cases, the amount of energy contracted is calculated as a per-
centage of the demand and it is distributed among the units in
proportion to their firm power capacity.
The results from adding physical contracts can be seen in
Fig. 5. The exercise of market power drops significantly when
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Fig. 5. Clearing prices in a game by firms strategy, with physical bilateral
contracts.
Fig. 6. Clearing prices in a game by firms strategy, with financial bilateral
contracts.
there is an increase in generation contracting, that is to say, the
clearing price of the market is reduced to levels that are closer
to the marginal cost.
On the other hand, the results from adding financial contracts
are shown in Fig. 6. Again, it is possible to see that the market
power exercise drops considerably when there is an increase in
the level of contracting. Even more, it is also possible to see that
the results obtained, in terms of clearing prices, are very similar
to the ones obtained in the case of physical contracts. A slight
difference can be observed by comparing the effect of physical
bilateral contracts and financial ones; the last ones introduce a
more volatile behavior.
VII. CONCLUSIONS
The simulation model developed is a useful tool to analyze
the behavior of agents in an electric generation hydrothermal
market. Its main contribution to the sate of the art is its capability
to represent simultaneously thermal and hydro power stations,
with the possibility of having both types of power units acting
strategically.
This is a short-term analysis model, created for the purpose
of studying a one day ahead power exchange with hourly bids.
It can also be used to analyze periods that are longer than one
day, extending to weeks or a month. Its main constraint for
longer-term studies is its lack of the stochastic dimension of
hydrology. The authors are pursuing further developments on
IEEE TRANSACTIONS ON POWER SYSTEMS, VOL. 18, NO. 1, FEBRUARY 2003
market simulators for medium and long-term horizons. For that
purpose, the annual and interannual regulation capacity of the
different reservoirs and the hydrological stochastic dimension,
among other new aspects, are being considered.
Conclusions on market behavior in a hydrothermal market,
such as the SIC, can be reached by observing firms acting strate-
gically. Firms can exert significant market power, and that can
be seen through a considerable increase in the clearing price
for power, mainly during the peak demand hours. Additionally,
the firms with hydroelectric generation capacity use less water
in peak demand hours in order to make prices increase during
those hours. The need of these firms to develop long-term con-
tracts has an important mitigation effect on their market power.
ACKNOWLEDGMENT
The authors acknowledge the helpful comments received
from four anonymous reviewers.
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Jorge Villar received the B.Sc. and M.Sc. degrees
in electrical engineering from Catholic University of
Chile, Santiago.
Currently, he is a Researcher with the Power Group
at Pontificia Universidad Católica de Chile, Santiago.
His research interests include power market simula-
tion and regulation.
Hugh Rudnick (F’00) received the B.Sc. degree
from the University of Chile, Santiago, and received
the M.Sc. and Ph.D. degrees from Victoria Univer-
sity, Manchester, U.K.
Currently, is Professor of Electrical Engineering at
Catholic University of Chile, Santiago. His research
and teaching activities focus on the economic opera-
tion, planning, and regulation of electric power sys-
tems. He has been a consultant with utilities and regu-
lators in Argentina, Bolivia, Central America, Chile,
Colombia, Peru, Venezuela, the United Nations, and
the World Bank, mainly on the design of deregulation schemes and transmission
and distribution open-access tariffs.