A New GA-approach for Optimizing Bidding Strategy
Viewpoint of Profit Maximization of a GENCO
A.Azadeh1,S.F.Ghadrei2,B.Pourvalikhan Nokhandan3
Department of Industrial Engineering, College of Engineering
University of Tehran
Tehran, Iran, P.O. Box 11155-4563
Abstract—Generation companies (GENCO) wish to
maximize their profit while participate in the electricity market.
In this paper, a GA approach is developed for solving GENCO
profit maximization problem to determine optimal bidding
strategy for GENCO in the day-ahead market. It is assumed that
Each GENCO submit its own bid as pairs of price and quantity.
Also, it was assumed that the sealed auction with a pay-as-bid
MCP would be employed. Since, there are some complex
constraints for GENCO to be taken into account; this is a non-
convex problem which is difficult to solve by traditional
optimization techniques. In this paper, problem is solved from
view point of profit maximization of GENCO that consider both
rivals’ bid and profit functions. Therefore, there is a multi-
objective function to solve. A simple example is designed and
illustrated how GA-approach can tackle this problem efficiently.
Index Terms—bidding strategy, profit maximization,
Genetic Algorithm, Day-ahead market, GENCO.
I. INTRODUCTION
I n the competitive electricity market, generation is
dispatched based on bids; and each generation companies
(GENCOs) need to compete with rivals via bidding to the
market. Competition creates the opportunities for GENCOs to
get more profit [1].
The bidding strategy problem was developed by many
researchers [2–17]. They used many different methods to
solve the optimal bidding strategy problem. Monte Carlo
Simulation is one of these methods [18-19]. It repetitively
computes the optimal bidding strategy for one player with
randomly rival bidding. Reinforcement Learning is one else
method to solve the optimal bidding strategy problem [20-21].
In this method, next bidding price will be determined by
artificial agent in each round of the auction. This chosen price
corresponds to load forecast and previous experience. If the
agent learned enough, selected bidding strategy based on
agent decision called optimal bidding strategy. Genetic
algorithm (GA) is one of them mentioned methods for finding
optimal bidding strategy [22-23]. In this study, the price
should being offered in the next round of bidding by GENCO
1
Email address: aazadeh@ut.ac.ir
Cell: +98 21 82084162
2
Email address: ghaderi@ut.ac.ir
Tel: +98 21 88021067
3
Email address: b_pourvali@yahoo.com
Tel: +98 915 1042778
978-1-4244-2758-1/09/$25.00 ©2009 IEEE
is encoded. This encoded bidding price will be improved by
GA process such as crossover and mutation process. To find
fitness value and calculate the price, the profit of all
participants must be known. This fitness function is the flaw
of this algorithm because each GENCO can not know their
rivals’ profits. However, GENCO need to forecast others
market participants’ bid. Stochastic dynamic programming
model considering risk management was used as a method to
find optimal bidding strategies in energy and reserve markets
[24].
GENCO need to predict optimal energy production and
optimal bidding price. An approach for predicting these
requirements was presented in Ref. [25]; but technical and
complex generation constraints didn’t be considered in their
model. These complex constraints consist of fuel cost, start-up
cost, generating limits and unit minimum up/down time
constraints [26].
In this paper, a new approach is proposed for determining
GENCO’s optimal bidding in the day-ahead electricity market.
This approach is developed from viewpoint of a GENCO that
participates in a market and wish to maximize its own profit.
It is assumed that the rivals’ bidding information is known or
can be estimated based on historical data. Also, Constraints
such as generating limits are considered. These constraints
make the problem more difficult and hard to solve using the
conventional optimization methods. Therefore, the
optimization problem is solved by using of Genetic Algorithm
taking constraints such as generator operating limits into
account. The proposed algorithm provides the optimal bidding
for GENCO. It is assumed that bids submitted as pairs of price
and quantity. In this study, optimal bidding strategy using GA
is provided based on the forecasted load, forecasted market
clearing price (MCP) and expectations concerning rival bids
and their profit functions. Therefore, there is a multi-objective
problem to solve.
This article is organized as follow: Section II presents
mathematical modeling of profit maximization problem for
optimizing bidding strategy. Section III gives an introduction
to GA. Optimal bidding strategy using GA is shown by a
simple example in Section IV including problem description
and GA-approach to solve it. Numerical results are presented
by section V. Conclusions are drawn in Section VI.
II. MATHEMATICAL MODELING
In this paper, it is assumed that each GENCO submit its own
bid as pairs of price and quantity in day-ahead electricity
market. Suppose that there are K independent GENCOs
participating in electricity market in which the sealed auction
with a pay-as-bid MCP is employed. It is assumed that
GENCOS have information such as forecasted load, Following constraint (8) represent that total energy is supplied
forecasted price and expectations of rival bids. Suppose jth f
by market must meet demand. Where P is forecasted
GENCO wish to participate in this market. The objective of
demand by jth GENCO.
this GENCO is to maximize its own profit (i.e., revenue minus K
cost) subject to all prevailing constraints. For GENCO at
considered hour, the profit is given as
∑P
j =1
j = Pf (8)

π j = RV j − TC j (1) Also, the market clearing price at considered hour can be

represented by (9):
π j , RV j , TC j
are profit, the total revenue and total CP = C f +ε
production cost for jth GENCO, respectively. Total revenue (9)
and total production cost can be calculated at considered hour,
ε ≈ N (μ ,σ 2 )
from (2) and (3) respectively. P f
where C is the actual price at considered hour, C is the
forecasted price by jth GENCO, ε is a stochastic variable
Nj

RV j = ∑ C ji Pji (2) subject to the normal distribution with mean μ and variance
i =1
2
(3)
σ2, which are obtained from the historical forecasts. The
TC j = a j + b j Pj + c j Pj
players are willing to offer a high price with a related tolerable
Nj risk. In addition, more constraint can be considered.
Where is the number of bid segments for jth GENCO.
C ji Pji III. INTRODUCTION TO GA
and are offered price and quantity at segment i for
Pj The well-known genetic-algorithm optimization techniques
jth GENCO, respectively. is the total quantity produced by implement the basic biological principles. Genetic Algorithms
Nj is one of the powerful non-deterministic methods to solve and
Pj = ∑ Pji optimize and find the best solution for the complex and non-
i =1
(4) linear problems especially NP problems.
jth GENCO at considered time where
There is a population of potential and feasible solutions for the
A: Objective Function each defined optimization problems. GA operates on initial
In this case, Each GENCO is aware of its rivals trying to population members (called chromosome) based on their
maximize their profits, too. So there is a multi objective fitness. Chromosomes with the best fitness are selected to
function to solve. In this case, GENCO maximize its own create new generation in the next round. Next generation
profit while maximize rival’s profits, too. chromosomes would have the better fitness and better
Most of the conventional algorithms reformulate a given approximations to best solution. Figure 1 shows the total
multi-objective optimization problem into a single objective- structure of a simple GA [27- 29].
function to be minimized or maximized. In this method a
single objective-function is formed from combination of
objectives to be optimized by determining appropriate weights
representing their importance. Following formulation is
selected as objective function based on two expert’s idea.
K K
α 0 (∑ π j ) + ∑α π
max j =1 j =1
j j
(5)
Objective function mentioned by (5) is a convex linear
K

∑α j =1
combination of GENCOs’ profit functions where j=0
.
α0 is coefficient of sum of profits. In this way, Coefficients
can be determined by experts from before experiments.
Fig. 1: Structure of a Genetic Algorithm

Genetic Algorithms are generally based on three modules

B: Subject to constraints known as production module, evaluation module and
Following constraint (6) represent offered price in each reproduction module.
segment has to be lower than market price cap. (a) Production module contains a set of operators and
C ji ≤ price _ cap j = 1..K , i = 1...N j (6) techniques for creating and manipulating population. The
Following constraint (7) represent GENCO’s minimum and initialization operator is used to create the initial population by
maximum generation requirements. filling it with randomly generated individuals. Each individual
min is a representative of the problem solution which is identified
Pj ≤ Pj ≤ Pjmax j = 1..K (7) by its digit string. The deletion operator deletes all old
population which can not contribute as influential parents in
 new next generations when the reproduction has been
occurred.
(b) Evaluation module involves checking the individuals to
see how good they are able to satisfy the objectives in the
problem. The fitness operator quantifies the total characters of
each chromosome (individual) in the population. The
evaluating fitness operator assesses the value of fitness
function of each chromosome in order to satisfy the objectives
based on maximum or minimum level.
(c) Reproduction module is really the most important stage in
GA. The module includes three main operators. The selection
operator is beneficially used to determine which individuals as
parents are chosen for mating and how many off springs, each
selected individuals and produce. The recombination operator
is used to produce new chromosomes in combining the
information contained in the parents. After recombination,
each off spring undergoes small perturbations (size of
mutation step) with low probability by the mutation operator
[30].
IV. OPTIMAL BIDDING STRATEGY BY GA
A: Example-Problem Description
Suppose that there are two independent GENCOs willing to
participate in electricity market. Suppose first CENCO wish to
participate at market and maximize its own profit.
The problem is going to be solved from GENCO’s point of
view considering his rival’s bid. In this way, GENCO wish to
maximize his profit while consider his rival wishing to
maximize his profit, too. So, GENCO is going to solve two
maximization problems. As mentioned before, one approach is
transfer two objective to a single objective by giving some
coefficient to each objective based on its important.
Suppose player 1 wish to maximize his profit considering his
rival bid wishing to maximize his profit, too. So, following
single objective based on an expert idea is used instead of two
maximization objective.
max 0.5 * (π 1 + π 2 ) + 0.3π 1 + 0.2π 2
Suppose player 1 decide submit his bidding by three
segments. Suppose that forecasted demand and forecasted
market clearing price by player 1 are 30 MVh and 7.5$,
respectively. Also price cap is equal to 8$. Suppose this player
considers caps for each segment’s quantity equal to 5, 10, and
15(MVh). Also, he determines his offered price for each
segment based on historical data, price cap and forecasted
price equal to 2, 5, 7 ($) respectively. Also, suppose player 1
knows that his rival wishes to bid on three segments. Player 1
expect three caps for quantity bidding of his rival equal to 6,
10, 20 (MVh) and three offered price equal to 2, 5, 7 ($).
Suppose minimum and maximum generation for player 1 is
equal to 11 and 15 (MVh), respectively. Also minimum and
maximum generation for player 2 equal 16 and 20 (MVh),
respectively. Total cost of player 1 and player 2 are considered
fixed and equal 10 and 15, respectively.
parent1_1 0 0 1 0 1 1 0 3 1 0 0 0 0 1 0 1 0 1
parent1_2 0 0 3 0 0 3 0 3 2 0 0 1 0 2 1 1 0 0
Now, player 1 try to choose parameters based on constraints
1 1 1 1 1 0 0 0 0 1 1 1 1 0 1 1 1 0
Mask1
0 1 0 0 1 1 0 0 1 1 1 0 1 0 0 1 1 1
Mask2
for maximizing own profits. The unreality data are used in this
example because of simplifying problem to show efficiency of
proposed GA solving such problems. In follow, a GA-
approach is proposed for solving this problem.
B: GA Procedure
The proposed methodology consists of following
components:
• Representation
For this problem, the proper cumulative offered quantities for
both GENCOs are selected as control variables in this
problem. Each chromosome in this GA consists of these 6
variables and can be expressed as follow:
chromosome q11 q12 q13 q 21 q 22 q 23
q ji = Pji + Pj ( i −1) (11)
j = 1,2..i = 1..3 and Pj 0 = 0
• Fitness Function
In this study, the value of the objective functions (profits) is
used to designate the fitness of each chromosome. Fitness
function is considered based on (10).
• Initialization
Based on the feasible and operating range of the control
variables; the chromosome’s of first population is randomly
initialized.
• Reproduction
Competition method is used for chromosome selection in this
problem. Selected chromosomes compose Mating pool. In
fact, Reproduction operator select a set of the best
chromosomes but none of these are new.
• Crossover
Crossover operator creates new chromosomes from randomly
selected chromosomes from mating pool. The crossover
operator is carried out according to a rate of crossover. In this
study crossover rate is defined as 0.7. Our approach is as
follow:
Two chromosomes are selected from Mating pool as parents,
randomly. A number is selected from interval (0, 1) randomly
and uniformly. If random number is less than crossover rate
then crossover operator create two new chromosomes as child
from parents, else parents will be copied in child
chromosomes cell by cell. Parents are encoded as a four-based
number. Four-based coding is selected because selected
cumulative quantity values are small in this paper. Childs are
created by use of Mask array.
• Mutation
The mutation operator is carried out according to a rate of
mutation. In this study, mutation rate is considered as 0.02.
Childs will be copied in an array as future parents, so it must
return to first step for fitness calculating. Mutation operator
changes two cell content of child if random number be lower
than mutation-rate.
Parent 1 1 5 13 0 4 17
Parent 2 3 3 14 1 9 16
child1_1 0 0 1 0 1 3 0 3 2 0 0 0 0 2 0 1 0 0
profit maximization problem to solve. Also, in our study,
child1_2 0 0 3 0 1 1 0 2 1 0 0 1 0 2 1 1 0 1 constraints such as generation limits were included in the
problem. Therefore, the optimal bidding strategies were
child1 1 7 14 0 8 16 resulted from an optimization problem solving that takes these
constraints into account. This was a non-convex problem
child2 3 5 13 1 9 17
which is difficult to solve by conventional optimization
techniques. Therefore, in this study, Genetic Algorithm was
• Termination criteria used to solve the problem. A simple example was defined and
There are various methods to end genetic algorithm running. illustrated how this approach could tackle this problem
Here, algorithm will be finished by determined number of efficiently. This example assumed a day-ahead market with
repetitions. two players concern to participate in market. In this example,
Initial population of chromosomes is shown in TABLE I by GA-approach find the optimal bidding strategy based on some
appendix A. assumptions such as the forecasted load, forecasted market
clearing price (MCP) and some expectations such as rival bids
V. SIMULATION RESULTS and profit functions. Numerical results represented that two
Following figure and Tables shows GA results for designed players using this approach for solving their problems achieve
problem. a common solution to submit bids. Therefore, they got
Optimal solution for problem is given by follow chromosome: equilibrium for bidding.

chromosome 1 5 13 0 4 17

Also, problem has been solved from view point of player 2.

Optimal solution is given by follow chromosome:

chromosome 1 5 13 0 4 17

The interested result is that two player achieve a common

solution to submit bids.
Price Price

7
7
5
5
2
2
Quantity Quantity

1 5 13 4 17
a. optimal bid for b. optimal bid for
player 1 player 2
Profit =68 Profit =96

Fig. 2. Optimal bidding strategy from viewpoint of player 1 (also player 2)

considering rival’s profit function

VI. CONCLUSION
In this paper, a GA approach was developed for solving
GENCO profit maximization problem to determine optimal
bidding strategy for GENCO in the day-ahead market. It was
assumed that each GENCO submit its own bid as pairs of
price and quantity; and they know or can estimate rivals’
bidding information based on historical data. Also, it was
assumed that the sealed auction with a pay-as-bid MCP is
employed. The proposed method was developed based on
profit maximization of a GENCO considering rival’s bidding
and profit functions. Therefore, GENCO has a multi objective
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