Research on optimal bidding strategies for power suppliers based on sealed auction

Abstract

In the background of deregulated electricity marketplaces, the electricity price is not determined by a power authority but by competitive bidding behaviors of power suppliers. Competitive bidding makes power supplies being no longer just the electricity price takers. Each power supplier becomes involved in setting the electricity price. He could maximize his own profits according to information of his private cost and the market. But at the same time, power suppliers have to face some uncertain market information. It is significant to build power suppliers' bidding strategies models which can provide support for suppliers' bidding decision. Fortunately, sealed auction is a static game of incomplete information in essence and it can be more conformed to the features of bidding in electricity market, so auction models have been proposed for representing strategic behaviors of power suppliers. The related literatures for the most part have considered the costs as independent random variables drawn from some specific distribution and the price as an expected forecast value. However, given the demand, the price in fact is determined by the ordered bids of suppliers according to the market clearing rules. So the clearing price is a function of the power supplier's own bid and the competitive opponents' bids distributions. Based on the hypothesis that all suppliers have the same generation capacity and have no withholding strategies, the number of winners is fixed when the power demand is given. Hence, the market clearing price is an order statistic. In this paper, the sealed auction theory is applied to analysis the power supplier's bidding actions. Firstly, the probabilities of a supplier winning or loosing the bid are obtained in virtue of the order statistic method. The power supplier's bidding model is constructed. The general expressions of optimal bidding strategies of suppliers are derived next by using optimization theory and solving a differential equation. The results suggest that the equilibrium bid is increasing in cost and is always above or equal to the cost. The bid-cost margin is influenced by the total quantity of demand and the costs distributions. Then, a numerical example is presented to confirm the presented method. At last, the power demand's effects on the suppliers' bidding strategies are discussed.