Bilevel formulation of a policy design problem considering multiple objectives and incomplete preferences

Abstract

A bilevel optimization formulation of policy design problems considering multiple objectives and incomplete preferences of the stakeholders is presented. The formulation is presented for Feed-in-Tariff (FIT) policy design for decentralized energy infrastructure. The upper-level problem is the policy designer's problem and the lower-level problem is a Nash equilibrium problem resulting from market interactions. The policy designer has two objectives: maximizing the quantity of energy generated and minimizing policy cost. The stakeholders decide on quantities while maximizing net present value and minimizing capital investment. The Nash equilibrium problem in the presence of incomplete preferences is formulated as a stochastic linear complementarity problem and solved using expected value formulation, expected residual minimization formulation, and the Monte Carlo technique. The primary contributions in this article are the mathematical formulation of the FIT policy, the extension of computational policy design problems to multiple objectives, and the consideration of incomplete preferences of stakeholders for policy design problems.