Strategic bidding for price-maker producers in predominantly hydroelectric systems

Abstract

This paper proposes an equilibrium model to determine price and quantity strategic bids for generationcompanies participating in a day-ahead electricity market, with predominantly hydroelectric genera-tion. Each agent aims to maximize its profit by solving a bi-level optimization problem, where the upperlevel represents the producer revenue maximization problem, while the lower one consists of minimizing the cost of system operation, faced by the independent system operator. Price-maker companies operating both hydro and thermal plants are considered in a cascade hydro system with reservoirs managed by different owners. Consequently, a novel approach is proposed to decouple the first and secondlevels of the problem. We present an individual plant modeling, where the main constraints related toa hydrothermal system are considered. Through the utilization of the Karush–Kuhn–Tucker optimalityconditions, the bi-level optimization model is converted to a single level nonlinear problem, known inliterature as a mathematical program with equilibrium constraints (MPEC). To face the difficulties of thisnonlinear, nonconvex, multi-stage problem, the MPEC complementarity conditions are replaced by thestrong duality condition. Moreover, competition among several leaders is modeled as an iterative pro-cedure, and the methodology is applied in two systems with data and configurations derived from theBrazilian hydrothermal system.