Dynamic Bilevel Optimization of Market Participation and Strategic Bidding in Renewable-Dominated Electricity Markets

This study advances a hierarchical bilevel optimization paradigm to rigorously characterize the intertwined processes of strategic bidding and regulatory market participation in electricity systems increasingly dominated by renewable resources. At the upper tier, a central regulatory authority orchestrates participation rules, renewable integration mandates, and incentive mechanisms with the overarching aim of maximizing system-wide social welfare while driving decarbonization and reliability objectives. At the subordinate level, profit-maximizing generation firms—each managing heterogeneous renewable portfolios—pursue strategic bidding under deep uncertainty, conceptualized as a multi-agent game governed by imperfect and asymmetric information. The interaction between these tiers is formalized as a bilevel Stackelberg game that encapsulates price-responsive demand, intertemporal reserve adequacy, and policy-driven incentive structures. To ensure both computational tractability and robustness against strategic indeterminacy, the lower-level equilibrium is reformulated into a mathematical program with equilibrium constraints (MPEC), enabling a hybrid solution procedure that combines penalty-based regularization with exact decomposition algorithms. The framework’s efficacy is validated through a stylized multi-zone case study featuring diverse renewable assets and strategic participants, revealing how policy signals, capacity ceilings, and market power asymmetries reshape efficiency frontiers and bidding equilibria. A set of high-resolution post-processing visualizations is further employed to illustrate the dynamic evolution of marginal prices, equilibrium trajectories, and regulatory impacts under uncertainty.