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Abstract
The trend towards competition in the electricity sector has led to efforts by the research community to develop decision and
analysis support models adapted to the new market context. This paper focuses on electricity generation market modeling. Its aim is
to help to identify, classify and characterize the somewhat confusing diversity of approaches that can be found in the technical
literature on the subject. The paper presents a survey of the most relevant publications regarding electricity market modeling,
identifying three major trends: optimization models, equilibrium models and simulation models. It introduces a classication
according to their most relevant attributes. Finally, it identies the most suitable approaches for conducting various types of
planning studies or market analysis in this new context.
r 2003 Elsevier Ltd. All rights reserved.
Keywords: Deregulated electric power systems; Power generation scheduling; Market behavior
1. Introduction
In the last decade, the electricity industry has
experienced signicant changes towards deregulation
and competition with the aim of improving economic
efciency. In many places, these changes have culminated in the appearance of a wholesale electricity
market. In this new context, the actual operation of
the generating units no longer depends on state- or
utility-based centralized procedures, but rather on
decentralized decisions of generation rms whose goals
are to maximize their own prots. All rms compete to
provide generation services at a price set by the market,
as a result of the interaction of all of them and the
demand.
Therefore, electricity rms are exposed to signicantly
higher risks and their need for suitable decision-support
models has greatly increased. On the other hand,
regulatory agencies also require analysis-support models
in order to monitor and supervise market behavior.
Traditional electrical operation models are a poor t
to the new circumstances since market behavior, the new
driving force for any operation decision, was not
modeled in. Hence, a new area of highly interesting
*Corresponding author. Tel.: +34-91-542-28-00; fax: +34-91-54231-76.
E-mail address: mariano.ventosa@iit.upco.es (M. Ventosa).
0301-4215/$ - see front matter r 2003 Elsevier Ltd. All rights reserved.
doi:10.1016/j.enpol.2003.10.013
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Optimization
Problem for
One Firm
Electricity
Market
Modeling
Market
Equilibrium
Considering
All Firms
Exogenous
Price
Demand-price
Function
Cournot
Equilibrium
Supply Function
Equilibrium
Equilibrium
Models
Simulation
Models
Agent-based
Models
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M. Ventosa et al. / Energy Policy 33 (2005) 897913
Single-firm
Optimization Model
Optimization Program
of firm f
maximize :
( x)
subject to : h f ( x ) = 0
f
g (x ) 0
899
Equilibrium Model
Optimization Program
of Firm 1
Optimization Program
of Firm f
( xf )
maximize : 1 ( x1 )
maximize :
subject to : h1 ( x1) = 0
subject to : h f ( x f ) = 0
g (x ) 0
1
(x ) 0
f
Supply = Demand
Supply = Demand
Electricity Market
Electricity Market
Optimization Program
of Firm F
maximize :
( xF )
subject to : h F ( x F ) = 0
g F (x F ) 0
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These models can again be classied into two subgroups, depending on whether they use a deterministic
or probabilistic price representation.
3.1.1. Deterministic models
A good example is the model proposed in Gross and
Finlay (1996).1 In this model, since the price is
considered to be exogenous, it is shown that the rms
optimization problem can be decomposed into a set of
sub-problemsone per generatorresembling the
Lagrangian Relaxation approach.2 As expected in a case
of perfect competition, deterministic price and convex
costs, the simple comparison between each generators
marginal cost and the market price decides the production of each generator; therefore, the best offer of each
generation unit consists of bidding its marginal cost.
3.1.2. Stochastic models
The previous approach can be improved if price
uncertainty is explicitly considered. For instance,
Rajamaran et al. (2001) describe and solve the selfcommitment problem of a generation rm in the
presence of exogenous price uncertainty. The objective
function to be maximized is the rms prot, based on
the prices of energy and reserve at the nodes where the
rms units are located, which are assumed to be both
exogenously determined and uncertain. Similar to the
Gross and Finlay approach, the authors correctly
interpret that, in this setting, the scheduling problem
for each generating unit can be treated independently,
which signicantly simplies the process of obtaining a
solution, thus permitting a detailed representation of
each unit. The problem is solved using backward
Dynamic Programming and several numerical examples
illustrate the possibilities of this approach.
A number of recent models represent the price of
electricity as an uncertain exogenous variable in the
context of deciding the operation of the generating units
and at the same time adopting risk-hedging measures.
Fleten et al. (1997, 2002) address the medium-term risk
management problem of electricity producers that
participate in the Nord Pool. These rms face signicant
uncertainty in hydraulic inows and prices of spot
market and contract markets. Considering that prices
and inows are highly correlated, they propose a
stochastic programming model coordinating physical
generation resources and hedging through the forward
market. They model risk aversion by means of penalizing risk through a piecewise linear target shortfall cost
function. More recently, Unger (2002) improves the
1
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4. Equilibrium models
Approaches which explicitly consider market equilibria within a traditional mathematical programming
framework are grouped together into the equilibrium
models category. As mentioned earlier, there are two
main types of equilibrium models. The commonest type
is based on Cournot competition, in which rms
compete in quantity strategies, whereas the most
complex type is based on SFE, where rms compete in
offer curve strategies. Although both approaches differ
in regard to the strategic variable (quantities vs. offer
curves), both are based on the concept of Nash
equilibriumthe market reaches equilibrium when each
rms strategy is the best response to the strategies
actually employed by its opponents.
4.1. Cournot equilibrium
Although the theoretical support of applying Cournot
equilibrium model to electricity markets is controversial,
the economic research community tends to agree that, in
the case of imperfect competition, this is a suitable
market model. In addition, it has frequently been used
to support market power studies. A thoughtful collection of essays regarding Cournot competition, which
links this approach with other later modelsincluding
the SFE mentioned abovecan be found in (Daughety,
1988).
Cournot equilibrium, where rms choose their optimal output, is easier to compute than SFE because the
mathematical structure of Cournot models turns out to
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5. Simulation models
As indicated above, equilibrium models are based on
a formal denition of equilibrium, which is mathematically expressed in the form of a system of algebraic
and/or differential equations. This imposes limitations
on the representation of competition between participants. In addition, the resulting set of equations, if it has
a solution, is frequently too hard to solve. The fact that
12
In general, SFE-based approaches model the demand function as
inelastic, which is the most suitable hypothesis in the case of electricity.
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No
E&W Pool
E&W Pool
IEEE 30-bus system
Pennsylvania
E&W Pool
E&W Pool
Four-node case
30-node case
No
No
No
Yes
No
No
No
Yes
Yes
Necessary conditions
Numerical integration
Closed-form expression
Exhaustive enumeration
Closed-form expression
Heuristics
Heuristics
Heuristics
MPEC
No
No
Yes
Yes
No
Yes
Yes
Yes
Yes
Klemperer and Meyer (1989)
Green and Newbery (1992)
Green et al. (1996)
Ferrero et al. (1997)
Rudkevich et al. (1998)
Baldick et al. (2000)
Baldick and Hogan (2001)
Berry et al. (1999)
Hobbs et al. (2000)
Convex
Quadratic
Linear
Afne
Stepwise
Afne
Afne
Afne
Afne
Concave
Linear
Linear
Inelastic
Inelastic
Linear
Linear
Linear
Linear
No
Yes
No
Yes
Yes
Yes
Yes
Yes
Yes
Transmission
network
Asymmetric
rms
Author
Table 1
A characterization of SFE models
Marginal
costs
Demand
curve
Supply functions
Capacity
constraints
Solution
method
Numerical
application
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Competition
Oligopoly
Monopoly
Perfect
Competition
Leader in
Price
Nash
Equilibrium
(Cournot and
SFE)
Nash
Equilibrium
(Cournot and
Stackelberg)
Medium Term
(Months)
Time
Scope
Long Term
(Years)
considering more specic attributes. These characteristics are useful in understanding the advantages and
limits of each model surveyed in previous sections. The
taxonomy presented here considers the following issues:
degree of competition, time scope of the model,
uncertainty modeling, interperiod links, transmission
constraints, generating system representation and market modeling.
6.1. Degree of competition
Markets can be classied into three broad categories
according to their degree of competition: perfect
competition, oligopoly and monopoly.
Since microeconomic theory proves that a perfectly
competitive market can be modeled as a cost minimization or net benet maximization problem, optimizationbased models are usually the best way to model this type
of market. Similarly, a monopoly can be modeled by the
prot maximization program of the monopolistic rm
(see Fig. 3). In these models the price is derived from the
demand function. In contrast, under imperfect competition conditionsthe most common situationthe prot
maximization problem of each participant must be
solved simultaneously. In addition, as discussed in the
next subsection, the suitability of each oligopolistic
model depends on the time scope of the study.
6.2. Time scope
The time scope is a basic attribute for classifying
electricity models since each time scope involves both
different decision variables and different modeling
approaches. For example, when long-term planning
studies are conducted, capacity-investment decisions are
the main decision variables while unit-commitment
decisions are usually neglected. On the contrary, in
short-term scheduling studies, start-ups and shut-downs
become signicant decision variables, while the
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Uncertainty
Intraperiod
constraints
Interperiod
constraints
Single
Node
Probabilistic
Transshipment
Model
DC
Model
Deterministic
Interperiod
Links
AC
Model
Single
Node
Transshipment
Model
DC
Model
Probabilistic
AC
Model
Deterministic
Intraperiod
Constraints
Interperiod
Constraints
Transmission
Network
Fig. 4. Characterization of some electricity market models according to the modeling of uncertainty, transmission network and interperiod links.
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Uncertainty
Exogenous
Price
Single-firm
Residual
Demand
909
Imperfect
Market
Equilibrium
Low
Probabilistic
Medium
High
Deterministic
Market
Modeling
Low
Probabilistic
Medium
Deterministic
Exogenous
Price
High
Single-firm
Residual
Demand
Imperfect
Market
Equilibrium
Generating
System Modeling
Fig. 5. Characterization of some electricity market models according to the treatment of uncertainty, generation system modeling and market
modeling.
7. Major uses
As mentioned in Section 2, differences in mathematical structure, market modeling and computational
tractability provide useful information in order to
identify the major use of each modeling trend. This
section summarizes the experience and conclusions
drawn from the publications referred to in Sections 3
5 regarding the major uses of single-rm optimization
models, imperfect market equilibrium models and
simulation models (see Table 2).
One-rm optimization models are able to deal with
difcult and detailed problems because of their better
computational tractability. Good examples of such
models are those related to short-term hydrothermal
coordination and unit commitment, which require
binary variables, and optimal offer curve construction
under uncertainty, which not only needs binary variables but also involves a probabilistic representation of
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Table 2
Major uses of electricity market models
Major use
One-rm optimization
models
Simulation models
Risk management
Unit commitment
Short-term hydrothermal
coordination
Strategic bidding
Market design
Long-term hydrothermal
coordination
Congestion management
Table 3
Major uses and main features of the reviewed market models
Year Major use
Main feature
Perfect
Competition and
Exogenous price
1996
1997
1999
2001
2002
Generation scheduling
Hydro and risk management
Hydro and risk management
Unit commitment
Hydro and risk management
Deterministic prices
LP
Stochastic prices and inows LP
Solution method
Benders
Price uncertainty
DP
Risk modeling
LP
1999
2001
2002
2002
Unit commitment
Thermal modeling
Short-term hydrothermal coordination Non-convex prot
Offer curve construction
Stochastic demand function
Offer curve construction
Practical approach
Green
Ferrero et al.
Berry et al.
Hobbs et al.
Baldick et al.
Baldick et al.
Day and Bunn
1996
1997
1999
2000
2000
2001
2001
Cournot equilibrium
1996
1998
1999
2000
2000
2000
2001
2003
Stackelberg
Ventosa et al.
Murphy and Smeers
Spatial Cournot
CV
CSF
Agent-based
Intended market
Large
Large
Large
Large
Large
E&W
Nord Pool
MIP
MIP
NLP
MIP
Large
Large
Small
Large
Spain
Spain
New Zealand
Spain
Symmetric rms
Symmetric rms
Closed-form solution
NI
NI
Analytic
Small
Small
Small
E&W
E&W
Pennsylvania
Market design
Congestion management
Congestion management
Congestion management
Market power analysis
Market design
Market power analysis
Closed-form solution
AC Network Model
DC Network Model
DC Network Model
Piecewise linear SFE
Non-decreasing SFE
Asymmetric rms
Analytic
Enumeration
Heuristic
MPEC
Heuristic
Heuristic
Enumeration
Small
Small
Small
Medium
Small
Medium
Medium
E&W
Hydrothermal coordination
Hydrothermal coordination
Market power analysis
Risk analysis
Yearly economic planning
Long-term hydrothermal coordination
Hydrothermal coordination
Hydrothermal coordination
Hydro-interperiod links
Analytic modeling
Radial congestion
Stochastic prices and inows
Agents behavior
Stochastic inows
Hydrothermal modeling
Stochastic inows
DP
DP
Heuristic
Simulation
Heuristic
DP
MCP
NLP
Medium
Medium
Medium
Large
Large
Large
Large
Large
Investment decisions
Investment decisions
MPEC
EPEC
Medium
Medium
Hogan
Oren
Wei and Smeers
Hobbs
1997
1997
1999
2001
Network constraints
Network constraints
Transshipment model
DC power ow
NLP
Analytic
VI
LCP
Small
Small
Large
Large
Garc!a-Alcalde et al.
Day et al.
Bower and Bunn
Fitting procedure
DC power ow
Learning procedure
LCP
LCP
Heuristic
Large
Spain
Large
E&W
Medium E&W
Congestion
Congestion
Congestion
Congestion
management
management
management
management
Nord Pool
E&W
E&W
E&W
New Zealand
California
California
Spain
Spain
Brazil
Spain
Europe
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analyze realistic cases that include a detailed representation of the generation system and the transmission
network. This line of research has also provided
theoretical results relative to the design of electricity
markets or to the medium-term operation of hydrothermal systems in the new regulatory framework. As in
the case of optimization models, the research community is now trying to develop a new generation of
equilibrium models capable of taking risk management
decisions under imperfect competition.
On the subject of market representation, there are
recent publications devoted to the improvement of
existing Cournot-based models. They propose the CV
approach to overcome the high sensitivity of the priceclearing process with respect to demand representation
typical of such models. Obviously, there are still
questions to be resolved. For instance, even when the
simple Cournot conjecture is assumed, pure strategy
solutions may not exist if there are transmission
constraints. Another example is that non-decreasing
supply functions may be unstable when generating
capacity constraints are considered.
The contribution of simulation models has been
signicant as well, on account of their exibility to
incorporate more complex assumptions than those
allowed by formal equilibrium models. Simulation
models can explore the inuence that the repetitive
interaction of participants exerts on the evolution of
wholesale electricity markets. In these models, agents
learn from past experience, improve their decisionmaking and adapt to changes in the environment. This
suggests that adaptive agent-based simulation techniques can shed light on certain features of electricity
markets ignored by static models and therefore these
techniques will be helpful in the analysis of new
regulatory measures and market rules.
As a concluding remark, it should be pointed out that
the impressive advances registered in this research eld
underscore how much interest this matter has drawn
during the last decade.
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