Bidding strategies in day-ahead energy markets: System marginal price vs. pay as bid

Abstract

In the present work, the problem of energy market price clearing and generation company (Genco) strategic bidding is considered with reference to existing day-ahead markets. The usual market settlement based on the system marginal price (SMP) is first addressed, this being the most widespread energy market implementation. The pay as bid (PAB) auction has been sometimes proposed as a viable alternative to SMP with the aim of increasing competition among Gencos by discouraging collusive behaviors and market power exploitation. The bidding problem is formulated as a strategic multi-player game in which the choice between different bidding levels and energy amounts to be sold at the market has to be made. The large size of the problem makes the application of classical game theory troublesome; for this reason, an agent based method belonging to the category of coevolutionary genetic algorithms was adopted. In the present paper the results to be expected form both market arrangements are then evaluated and compared, with particular reference to the day-ahead market applied to a small system. In the tests, the situation of imperfect competition arising when one of the Gencos has the opportunity to exert market power is considered. The impact that inter-area transmission system congestions may have on the mechanism of system pricing is also addressed.