A two-level optimization problem for analysis of market bidding strategies

Electricity markets involve suppliers (generators) and sometimes consumers (loads) bidding for MWhr generation and consumption. In this market model, a central operator selves an optimal power flow (OPF) based on the maximization of social welfare to determine the generation and load dispatch and system spot prices. In this structure, market participants will choose their bids in order to maximize their profits. This presents a two-level optimization problem in which participants try to maximize their profit under the constraint that their dispatch and price are determined by the OPF. This paper presents an efficient numerical technique, using price and dispatch sensitivity information available from the OPF solution, to determine how a market participant should vary its bid portfolio in order to maximize its overall profit. The paper further demonstrates the determination of Nash equilibrium when all participants are trying to maximize their profit in this manner.