Bidding in day-ahead electricity markets: A dynamic programming framework

Abstract

Strategic bidding problems have gained a lot of attention with the introduction of deregulated electricity markets where producers and retailers trade electricity in a day-ahead market run by a Market Operator (MO). All actors propose bids composed of a unit production price and a quantity of electricity to the MO. Based on these bids, the MO selects the most interesting ones and defines the spot price of electricity at which all actors are paid. As the bids of all actors determine the price of electricity, a bidding Generation Company (GC) faces a high risk regarding its profit when placing bids as the bids of competitors are not known in advance. This paper proposes a novel dynamic programming framework for a GC’s Stochastic Bidding Problem (SBP) in the day-ahead market considering uncertainty over the competitor bids. We prove this problem is NP-hard and study two variants of this problem solved with the dynamic programming framework. Firstly, a relaxation provides an upper bound solved in polynomial time (SBP-R). Secondly, we consider a bidding problem using fixed bidding quantities (SBP-Q) that has previously been solved through heuristic methods. We prove that SBP-Q is NP-hard and solve it to optimality in pseudo-polynomial time. SBP-Q is solved on much larger instances than in previous studies. We show on realistic instances that its optimal value is typically under 1% of the optimal value of SBP by using the upper bound provided by SBP-R.