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Electrical Power and Energy Systems 30 (2008) 207–215

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A game-theoretic model for electricity markets

with tight capacity constraints
Z. Hu a, L. Yang a,*
, Z. Wang a, D. Gan a,*
, W. Sun b, K. Wang a

a
Zhejiang University, College of Electrical Engineering, Hangzhou, Zhejiang 310027, China
b
Zhejiang Electric Power Dispatching and Communication Center, Hangzhou, Zhejiang 310007, China

Received 15 August 2006; received in revised form 2 July 2007; accepted 20 July 2007

Abstract

In this paper, an artificial neural network model for short-term price forecasting and a linear regression model for mid/long-term price
forecasting are described together with forecasting results. A detailed discussion on the choice of forecast models and forecast variables is
reported. The suggested methods are being utilized by the transmission company to forecast short-term and mid/long-term prices in the
Zhejiang Electricity Market. The results show that the proposed forecast models meet the basic requirement of Zhejiang electricity mar-
ket operation. A second objective of this work is to present the results of a series of experiments designed to justify certain game-theoretic
assertions and to explain the price volatility experienced in many real-world markets under uniform pricing and pay-as-bid pricing.
 2007 Elsevier Ltd. All rights reserved.

Keywords: Electricity markets; Price forecasting; Market power; Artificial neural network; Linear regression; Correlation analysis

1. Introduction has an expensive unit start-up cost. Electricity price move-

The Zhejiang Provincial Electricity Market has been
running since January 2000 with marginal success. This
market features a competitive generation submarket where
generators are paid at uniform market clearing prices
(MCP). A transmission company acts as the sole buyer in
the market. Electrical power procured by the company is
sold to end-users under regulated retail prices. Therefore,
the transmission company is exposed to a financial risk
introduced by the difference between MCPs and regulated
retail prices. Developing price forecasting methods and
software tools is an important part of the ongoing ‘‘Zhe-
jiang Electricity Market Risk Management and Decision
Support System’’ research project.
Electricity has distinct characteristics as compared to
other commodities. For example, it is non-storable and
*
Corresponding authors.
E-mail addresses: eeyangli@zju.edu.cn (L. Yang), deqiang.gan@
ieee.org (D. Gan).
ment shows more volatility than other common commodi-
ties. Thus, electricity price forecasting is extremely
important for all market players. Short-term price forecast-
ing aims at providing estimates of electricity prices a few
days into the future, while the objective of mid/long-term
price forecasting is to provide estimates of electricity prices
over several months. The results of short-term price fore-
casting can be used by the transmission company for a
variety of purposes, including to schedule short-term gen-
erator outages and design load response programs, to name
a few. They can also be used by the generation companies.
Similarly, the results of mid/long-term price forecasting
can be used for many purposes. For example, they can be
used to assess the risk of the transmission company, to
facilitate optimal transmission planning, to evaluate gener-
ation-side market power and develop mitigation proce-
dures, or to provide a basis for negotiations between the
transmission company and the generators providing local
voltage support. Depending on the needs of market, many
methods exist to forecast the electricity market price.

0142-0615/$ - see front matter  2007 Elsevier Ltd. All rights reserved.
doi:10.1016/j.ijepes.2007.07.008
208 Z. Hu et al. / Electrical Power and Energy Systems 30 (2008) 207–215
Neural networks (NNs) [1–3] and time series models [4–
6] are widespread in electricity price forecasting. Ref. [1]
provided an MCP predictor with confidence interval esti-
mation using cascaded neural networks. In Ref. [2], a
neuro-fuzzy-based method was developed to forecast the
locational marginal price. In this method, the fuzzy rules
were used to perform linguistic reasoning about the contin-
gencies. The reasoning results served as a part of the inputs
to the NNs. An artificial neural network employing a roll-
ing cross-validation scheme was used to forecast the long-
term market price in Ref. [3], and in Ref. [4], an approach
based on the generalized autoregressive conditional het-
eroskedastic (GARCH) was provided to predict next-day
electricity prices. In Ref. [5], a dynamic regression and a
transfer function model were proposed to forecast electric-
ity prices. Both of them were based on time series analysis.
Ref. [6] proposed an auto regressive integrated moving
average (ARIMA)-based method to predict next-day elec-
tricity prices. Most of those methods have shown good per-
formance on test examples.
However, forecasting methods sometimes are con-
strained by the data available in the real market, especially
in emerging markets. In addition, most of the existing
methods cannot effectively deal with price spikes in electric-
ity markets [7].
In this work, an ANN-based model and a linear regres-
sion model are proposed to forecast short-term prices and
mid/long-term prices, respectively. Both models have
inputs that reflect market power, an issue that is critically
important for a market with a tight capacity. Market
power is measured by an index called the must-run-ratio
(MRR), originally developed in our previous work [8–10].
In this paper, we will describe the results of class experi-
ments designed to test the effectiveness of this market
power index, together with price forecasting results. An
advantage of the presented models is that, due the judicious
choice of inputs, the number of required input variables
can be reduced significantly without a perceived loss of
accuracy. Furthermore, the forecasting model can capture
the price spikes, to some extent. Finally, we will present
some theoretical findings about MRR to explain the degree
of price volatility under MCP and PAB.
2. Market power and price forecast
The power dispatch and pricing is obtained from the fol-
lowing optimization problem [9]:
Min pT P
P !,
s:t: eT P  DP ¼ 0; ð1Þ
0 6 P 6 P;
where p is the bidding price vector of generators, e is a vec-
tor of ones, DP is the total demand, and P and P are the
production vector and upper bound production vector of
generators, respectively. The Lagrange function of the
above problem is
^ _
C ¼ pT P þ qðDP  eT PÞ  s T P þ s T ðP  PÞ; ð2Þ
^ _
where q; s and s are Lagrange multipliers. As is well-
understood, the price of the last accepted generator is
MCP, which is equal to the Lagrange multiplier q. If the
above problem has multiple optimal solutions, this implies
that the bid prices of some units are the same and these
generators set the clearing price. Under such circum-
stances, these generators are dispatched in proportion to
their capabilities [9]. We have made the following
assumptions:
1. eT P  DP P 0: This ensures that there are feasible solu-
tions to the auction problem.
2. Bid prices are subject to a price cap c.
3. A generator is allowed to bid on one block only.
A number of market studies have recently been per-
formed by the transmission company. The results show
that market power has a significant impact on MCPs. This
indicates that market power must be taken into consider-
ation when developing price forecast models. A market
power index, namely, the must-run-ratio, is selected as an
input to price forecasting model. This market power index
was recently developed and has been tested using ISO New
England market operation data. Let us first summarize the
main results from our previous work below.
Proposition A [9]. Suppose that in aPpool-based market
there exists a player A such that DP  j62A P j > 0, and all
generators have identical marginal costs. Then the game
possesses an equilibrium at which q ¼ c, where q* is the
market clearing price at the equilibrium point. Furthermore,
q ¼ c uniquely.
Proposition B [9]. Let I be the P set of all players. Suppose
that for every player A, A 2 I, j62A P j > DP , so that there
does not exist an equilibrium at which q > c. In other words,
if an equilibrium exists, then q = c at the equilibrium.
One of the objectives of this work is to justify the above
results from Refs. [8–10] by experiments and forecasting
price applications. These results show that, in a
market where generators are identical, the quantity ðDP 
P
j62A P j Þ, termed must-run generation, is an important mar-
ket index that dominates the behavior of suppliers. In a
market where generators are not identical, we found, using
a game-theoretic approach, that a numerical index termed
the must-run-ratio (MRR) is a dominating factor [8–10].
The value of MRR is calculated as follows:
!
X X
MRR ¼ max DP  Pj Pj ; ð3Þ
A2I
j62A j2A
where P j is the upper bound of generation unit j.
It is straightforward to derive the following observation:
as long as the value of the MRR of a supplier exceeds 0%,
there is at least one supplier who has the capability of con-
trolling the MCP.
 Z. Hu et al. / Electrical Power and Energy Systems 30 (2008) 207–215 209

The value of MRR is between 0% and 100%, with higher

values providing stronger incentive to raise the price. If the
numerical value of MRR for a supplier is equal to 100%,
then this supplier has an absolutely strong incentive to
bid at the cap price. We will present in Sections 3 and 4
how this numerical index can be judiciously utilized when
performing price forecasting.

3. Short-term price forecasting using ANN

Fig. 1. The structure of the suggested neural network.
3.1. The forecasting model

Several approaches for short-term price forecasting have Calculate MRR value for each
been reported. Among them ‘‘similar day price forecast- trading period of a day
ing’’ is a method that has long been used for short-term
load forecasting, as is the method of time series analysis. Train BP network using
It is our understanding that the ‘‘similar day’’ approach historical data
and time series analysis do not fit well in the context of
price forecasting because they cannot take into account Run BP network to computer
forecast price
the impact of such factors as planned outages and market
power. Artificial neural networks seems to be a ‘‘natural
choices’’ for short-term price forecasting because of their Adjust forecast price based
on MRR value
capability of modeling complex issues that determine the
behavior of market players, and thus the market clearing Fig. 2. Flowchart of the short-term price forecasting algorithm.
prices.
In order to successfully make use of an ANN, one has to
judiciously choose input variables from which the ANN
will be constructed. The most important decision we made
was concerning whether different ANNs should be con-
structed for different time periods. We believed that this
was unnecessary because market clearing prices are deter-
mined by the bidding strategies of suppliers. It is natural
to believe that a supplier mainly considers the following
factors when making a decision: the forecast load, the costs
and capabilities of its own generators and those of its riv-
als. These factors may show a certain degree of periodicity
but not inherently so.
A simple 3-layer neural network was developed in this
work using the Matlab neural network toolbox. This net-
work has three input variables: forecast load, MRR, and
the market price of the trading period of the previous day. Fig. 3. Actual prices vs. forecast prices, with adjustment, for July 12,
The output of the network is the forecast price. The struc- 2002.
ture of the suggested neural network is illustrated in Fig. 1.
To further enhance the price forecasting accuracy, a illustrated in Fig. 4. The dip in the actual price data at per-
threshold MRR is set up. If the MRR of a trading period iod 23 (11:30am) can be explained as follows: the load curve
exceeds the threshold, the output of the neural network is has a 1000 MW dip at that trading period; to ensure their
ignored and instead the price cap is substituted as the fore- production was allocated by Contract-For-Difference and
casting output. As a matter of the fact, the suggested price to avoid expensive unit start-up costs, many suppliers bid
forecasting approach combines the spirit of neural net- negative prices for that period to keep their units running.
works with that of game theory. The flowchart for the In addition, the actual settlement price is zero if the clearing
overall forecasting method is depicted in Fig. 2. price is below zero according to the market rule. This is
why, in that period, the clearing price is often below zero.
3.2. The forecast results To measure the relative errors in the software, the fol-
lowing numerical index is calculated:
The price forecast results using the proposed approach 1 XN
jpMCP;i  p0MCP;i j
are illustrated in Fig. 3. To make a valid comparison, the rMAPE ¼ ; ð4Þ
N i¼1 pMEAN
forecast results without the game-theoretic adjustment are
210 Z. Hu et al. / Electrical Power and Energy Systems 30 (2008) 207–215

of these factors involve uncertainty thus are not accurately

predictable. Several approaches have been considered dur-
ing the study. Fuzzy set theory seems to be suitable for the
situation, however the approach does not provide the
quantitative information needed for subsequent risk evalu-
ation. Neural networks are rejected because that method
does not give a confidence interval, which is a basic require-
ment of the work. Hence linear regression was chosen as
the price forecasting approach.
Let x1, x2, . . . , xp (p > 1) be independent random vari-
ables. The output of the linear regression model y is
obtained as
Fig. 4. Actual prices vs. forecast prices, without adjustment, for July 12,
2002.
y ¼ b0 þ b1 x1 þ    þ bp xp þ e; ð6Þ
2
where N(0, r ) denotes the usual Gauss Distribution;
where pMCP,i and p0MCP;i are the actual and forecast MCPs, b0, b1 , bp, r2 are unknown constants; and e is a random var-
respectively; pMEAN is the average daily price; and N is the iable with a Gaussian distribution, that is e  N(0, r2).
number of forecast periods. The most important task here is to choose the input
The absolute errors are defined as follows: variables x1, x2, . . . , xp so as to achieve the best price fore-
1 XN casting. After a careful analysis, the following were selected
rMAE ¼ jp  p0MCP;i j: ð5Þ as the input variables: forecast load, MRR, generation
N i¼1 MCP;i
cost, and the market prices of the previous week. Again,
A week in summer is selected to test the model. In this we found that the MRR was an important input variable
week, the range of MCPs appears rather large [659.93, for the linear regression model.
819.80]. Furthermore, there can be as many as four price
spikes within a day during this period. The error measure- 4.2. The forecasting results
ments are summarized in Table 1.
It was pointed out recently that the relative errors in A basic forecast period is a week long. The market clear-
price forecasting cannot be within 10% of actual prices ing price data for the 45 weeks between March 2001 and
[11]. The results summarized in Table 1 seem to support September 2002 were collected; among them data for 40
this assertion. It is worth noting that the precision of the weeks was used to construct the linear regression model,
introduced price forecasting approach can be higher if a and data for 5 weeks was used to test the regression model.
period during which market clearing prices are relatively The test results, including confidence intervals, are summa-
stable is selected. rized in Table 2.
We complete this section by mentioning that the neural While it can be seen that the average error is 14.47%, the
network described requires only a few input variables. This actual prices all fell into the confidence intervals. The price
is because the MRR variable nicely captures the market forecast results are thus of fairly high quality and are useful
performance. for the purpose of this study.
A correlation analysis has also been performed to inves-
4. Mid/long-term forecasting using linear regression tigate which factor affects mid/long-term prices most. The
analysis results are summarized in Fig. 5.
4.1. The forecast model From the figure one can conclude that MRR has the
most significant impact on mid/long-term electricity mar-
Many factors, including fuel costs, bank rates, generator ket prices. This indicates that MRR is an excellent index
and transmission outages, weather, market share changes, for describing market performance.
etc., affect mid/long-term electricity market prices. Many We complete this section by mentioning that a quadratic
regression model has been constructed by the authors and
Table 1
Forecast errors
Table 2
Forecast day rMAE ($/MWh) rMAPE (%)
Medium-term and long-term electricity price forecast results
02-07-09 40.782 19.145
Weeks Confidence interval Market price Error (%)
02-07-10 39.901 13.765
02-07-11 59.440 17.382 1 178.0905 ± 58.1055 149.07 19.468
02-07-12 59.587 15.291 2 332.4460 ± 80.1684 286.83 15.903
02-07-13 51.097 9.7132 3 288.0426 ± 40.9207 251.71 14.434
02-07-14 28.898 16.446 4 417.3471 ± 67.9940 383.01 8.965
02-07-15 72.985 16.893 5 175.1862 ± 66.7511 202.66 13.557
 Z. Hu et al. / Electrical Power and Energy Systems 30 (2008) 207–215
Fig. 5. Correlation coefficients.
tested against actual market data. As a comparison, both
models are tested under two circumstances. One is the
worst case scenario, in which forecasting results based on
linear regression model have more than 25% error on aver-
age. The other is a normal case with errors below 20% on
average, based on linear regression model. The forecasting
results data for the 31 weeks between April 2002 and
December 2002 were collected, which cover the worst and
ordinary cases. A comparison is illustrated in Fig. 6.
As shown in the figure, the quadratic regression model
has no superiority over the linear regression model. This
illustrates that the linear model would be the preferable
choice from the practical point of view.
5. Experiments and analysis
A series of experiments similar to those described in [12–
14] have been conducted to test the game-theoretic results
presented in our previous works. The outcomes of these
experiments are summarized in this section. Another objec-
tive of this section is to illustrate how the Nash equilib-
rium, as defined in [8–10], is calculated under specific
market conditions.
In the experiment, there were six generators which under
different ownership:
• Large generator A with capacity 3000 MW
• Large generator B with capacity 3000 MW
• Medium-sized generator C with capacity 2000 MW
• Medium-sized generator D with capacity 2000 MW
Fig. 6. Error comparison between the linear and quadratic regression
models.
211
• Small generator E with capacity 1000 MW
• Small generator F with capacity 1000 MW
The behavior of the above generators under the follow-
ing load levels was tested: 11,000 MW, 10,000 MW,
8000 MW, and 6000 MW. A price cap of 800 $/MW was
applied in all the experiments. The set of market conditions
actually resembled the actual situation in the Zhejiang elec-
tricity market.
Two experiments were conducted with different genera-
tor cost assumptions. In the first experiment, all generators
have the same cost, which is equal to 200 $/MW.
Using the approach described in [9], the Nash equilib-
rium points are easily calculated. Take the case where load
is at a lower level of 6000 MW, as an example. TheP must-run
generation for the largest generator is DP  j62A P j ¼
6000  ð3000 þ 2  2000 þ 2  1000Þ ¼ 3000 < 0. Then
by Proposition A the market clearing price at the Nash equi-
librium is equal to the cost (which is 200 $/MW).
When the load is at the high level of 11,000 MW,Pthe must-
run generation for the largest generator is DP  j62A P j ¼
11000  ð3000 þ 2  2000 þ 2  1000Þ ¼ 2000 > 0. Then by
Proposition B the market clearing price at the Nash
equilibrium is equal to the price cap (which is 800 $/MW).
Following the same procedure, all of the Nash prices can
be obtained. They are listed below in Table 3 for convenience.
The auction results are summarized in Table 4.
More auctions have been conducted in this work. The
results listed above are only typical. Although the above
auction results somewhat follow the principle of the Nash
equilibrium, they do not follow it that much in high-load
auction rounds. It is believed that in the high-load auctions
there are multiple Nash equilibrium points. This could be
the reason for high price volatility in real-world electricity
markets. In the low-load auctions, the auction results
match the Nash prices quite well. The reason could be that
the Nash equilibrium for these cases is unique.
In the second experiment, generator costs are assumed
to be different. Large generators have a cost equal to
100 $/MW, medium size generators have a cost equal to
Table 3
Nash prices from the first auction
Load Nash Prices
6000 200
8000 200
10,000 800
11,000 800
Table 4
Market clearing prices from the first auction
Load 11,000 10,000 800 600
1st round 700 600 200 200
2nd round 780 590 210 200
3rd round 400 200 200 200
212 Z. Hu et al. / Electrical Power and Energy Systems 30 (2008) 207–215

200 $/MW, while small generators have a cost equal to where N b<b denotes the number of time intervals with abso-
300 $/MW. The market clearing prices at the Nash equilib- lute error b less than a specified parameter b.  Similar to the
rium points are provided in Table 5. 
RPEP, the prescribed parameter b specifies the upper
The market clearing prices of this auction scenario are bound of absolute error.
summarized in Table 6 below. The proposed two indexes were tested based on actual
Again, one can find a close match between the low-load data in the Zhejiang electricity market. Both the spot price
auction results with their corresponding Nash prices, but data and the forecasting results data from May 2002 to
this conclusion is not quite valid for the high-load auctions. June 2003 were collected, including zero prices and those
close to price cap, which are very common in Zhejiang elec-
6. Error evaluations tricity market because of tight capacity constraints.
The RPEP was designed to be tested with the parameter e
In this section we will further evaluate the errors of price being equal to 10, 15, 20, 25, and 30. Similarly, the AEP is
forecasting models using two new indices. studied with the parameter b  being equal to 100, 150, 200,
250, and 300. Furthermore, since the effect of price forecast-
6.1. Short-term price forecasting errors ing in those intervals with a high real price is of more impor-
tance to the market members for the purposes of risk
Relative and/or absolute error indexes are typically uti- evaluation, those intervals with a high real price level were
lized to measure the performance of price forecasting. Nev- studied separately. In this work, two high price levels were
ertheless, given that drastic fluctuation of the electricity studied: one was with actual prices higher than 400 RMB/
price happens frequently, especially in those newly intro- MW, the other was with actual prices higher than
duced electricity markets, it is very difficult to evaluate 800 RMB/MW, which is very close to price cap in Zhejiang
the effect of price forecasting simply based on these two electricity market. It should be noted that N e<e , N b<b and N in
indexes. Here we introduce two modified relative/absolute the above formulas became the corresponding numbers of
error indexes for evaluating the effect of price forecasting. high price levels. The RPEP and AEP were tested in three
One index is relative percentage error probability (RPEP), cases: case I, all time intervals; case II, time intervals with a
which is defined as the probability of the event that the rel- price above 400 RMB/MW; case III, time intervals with
ative percentage errors of forecasting results are below a price above 800 RMB/MW. The results are presented in
prescribed value. The RPEP calculated as follows: Table 7.
N e<e In case I, only 36.2% of the results have relative percent-
RPEPe<e ¼ ; ð7Þ age errors less than 10%. Moreover, only 61.1% are limited
N
to errors below 25%. As for the AEP, only 74.7% of the
where N denotes the number of total time intervals in the results have absolute errors below 100 RMB/MW and
study and N e<e denotes the number of time intervals with 89.4% are below 200 RMB/MW. These results shows no
a relative percentage error e less than a specified parameter special advantages over other related reports found in the
e. The prescribed e is a parameter specifying the upper literature using neural networks. As explained in [15], the
bound on the relative percentage errors. main reason lies in that the statistics are based on the data
Another index is the absolute error probability (AEP), of all intervals, including peak prices and zero prices, (i.e.,
which means the probability of the event that the absolute price data were not preprocessed in advance). Zero prices
errors are below a prescribed value. The AEP is calculated or prices close to zero had a great impact on the evaluation
based on: of price forecasting since they could result in extremely
N b<b large relative errors, thereby worsening the value of RPRE.
AEPb<b ¼ ; ð8Þ The statistics show that among all the intervals, about
N
4.67% are those with real a zero (or approximate) price,
Table 5 6.65% are above 800 RMB/MW and 14.77% are above
Nash prices from the second auction
400 RMB/MW.
Load Nash prices It can be observed that when considering those intervals
6000 199.99 with a price above 400 RMB/MW (case II), the perfor-
8000 200 mance of price forecasting becomes better compared to
10,000 800
case I. It can also be observed that more than 90% of the
11,000 800
forecasting results with corresponding actual prices above
800 RMB/MW (case III) have relative percentage errors
Table 6 less than 10% and absolute errors below 100 RMB/MW.
Market clearing prices from the second auction
The effect of using our model to forecast the price cap is
Load 11,000 10,000 8000 6000 very satisfactory. As mentioned before, one of the main
1st round 780 300 200 100 characteristics of the short-term price forecasting algorithm
2nd round 800 290 200 190 proposed in this paper is the introduction of the MRR into
3rd round 300 290 200 180
the neural network. From the results, one could see that
 Z. Hu et al. / Electrical Power and Energy Systems 30 (2008) 207–215 213

Table 7
Typical RPEP and AEP results
Probability RPEP AEP
10 15 20 25 30 100 150 200 250 300
Upper boundary
Case I 0.362 0.464 0.545 0.611 0.660 0.747 0.835 0.894 0.922 0.938
Case II 0.483 0.506 0.550 0.601 0.657 0.524 0.601 0.702 0.762 0.816
Case III 0.903 0.908 0.913 0.917 0.920 0.905 0.912 0.917 0.921 0.926

this model has fairly good performance for forecasting Table 8

price caps. Typical mid/long RPEP
A more interesting probability distribution figure can be 10 15 20 25 30
drawn in Fig. 7 based on the overall statistics, and can be RPEP 0.379 0.603 0.707 0.810 0.845
regarded as evidence of the above-mentioned analysis.
Upon further investigation, a correlation analysis
between forecasting price and spot price showed that their
correlation coefficient is 0.788. This demonstrates that
there is a strong relationship between forecasted values
and actual spot prices.

6.2. Mid/long-term price forecasting errors

Here only the RPEP was studied to evaluate the effect of

mid/long price forecasting. Data over 58 weeks were col-
lected, from April 2002 to June 2003. The statistical results
are provided in Table 8.
Compared to Table 7, the RPEP of the mid/long-term is
better than that of the short term on the whole. The reason
is that weekly prices are calculated using averaging, and the
average operation on the prices has eliminated the effect of
price spikes and zero prices. The RPEP distribution for
mid/long-term is showed in Fig. 8. Obviously, the probabil-
ity values in this figure are correspondingly higher than in
Fig. 7.
Fig. 8. Mid/long-term RPEP distribution.
7. The results of the pay-as-bid auction
Whether pay-as-bid pricing can or should replace the
more common uniform pricing in electricity pool markets
is the subject of an ongoing debate [16,17]. To provide a
partial answer, we analyze the Nash equilibrium points
under pay-as-bid pricing in subsequent text. The auction
model follows the basic framework under uniform pricing
in [9].
Lemma 1. Under pay-as-bid pricing,suppose there is an
equilibrium at which q* > c, here q* is the last accepted
generator’s bid price. Then all accepted generators ask for
the same bid price.

Proof. Consider the following configuration:

Suppose there exists a supplier A such that pj < q*; here
pj is the bid for generator j 2 A. Generator j’s profit would
be:
p0 ¼ ðpj  cÞP j : ð9Þ
Now suppose the price of generator j is q*  e > pj, e > 0,
then the profit would become:
p00 ¼ ðq  e  cÞP j > p0 : ð10Þ
00 0
Generator j can always find an e > 0, such that p > p . This
indicates that generator j has an incentive to deviate from
bidding price pj. Thus the above configuration is not an
Fig. 7. Probability distribution for the short-term. equilibrium. This completes the proof. h
214 Z. Hu et al. / Electrical Power and Energy Systems 30 (2008) 207–215

Lemma 2. Under pay-as-bid pricing, if eT P  DP > 0, then Table 9

there is no equilibrium at which q* > c and several suppliers Market clearing prices from the third auction
bid at q*. Load 11,000 10,000 800 600
1st round 750 770 210 210
Proof. Suppose there is an equilibrium at which q* > c and 2nd round 730 670 210 210
the last accepted generators belong to several suppliers. By 3rd round 800 640 210 210
the hypothesis, eT P  DP > 0, there are suppliers whose
capacity is not completely satisfied. Let us consider the sit-
who have marginal generators. According to Lemma 2, this
uation where generators 1 and 2 (belonging to A and B
is not an equilibrium. h
respectively) set the clearing price. Supplier A’s profit
would be:
Proposition D (equilibrium under weak capacity con-
X P1
p0 ¼ ðpj  cÞP j þ ðq  cÞ b
L ; ð11Þ straints).
P Suppose the following holds for each supplier A,
j2A;pj <q
P1 þ P2 j62A P j P DP , then there is no equilibrium at which q* > c.
j6¼1 In other words, if an equilibrium exists, then at the equilib-
where bL is the residual load that the two generators supply. rium q = c.
If supplier A bids a price q*  g, g > 0, his profit would be:
Proof. Suppose there is an equilibrium at which q* > c.
b P P1
(1) L Let us consider the following possible configurations:
X j2A;p <q
p00 ¼ j
j6¼1
ðpj  cÞP j þ ðq  g  cÞP 1 ; ð12Þ (a) The marginal generators belong to one supplier.
P
" # Because for each supplier A, j62A P j P DP , the rivals
P1 þ P2  b
L bids of the supplier who has the marginal generators
p00  p0 ¼ P 1 ðq  cÞ g : ð13Þ
P1 þ P2 are not completely accepted. This means the rivals
would find it profitable to bid lower prices than q*
(2) b
L < P1 for their unaccepted generators. This configuration
X j2A;p <q
p00 ¼ j
ðpj  cÞP j þ ðq  g  cÞ b
L; ð14Þ is not an equilibrium.
j6¼1
(b) The marginal generators belong to several suppliers.
  According to Lemma 2, this configuration is not an
P2
p00  p0 ¼ b
L ðq  cÞ : ð15Þ equilibrium.
P1 þ P2  g
Therefore supplier A can always find an g > 0, such that The proof is complete. h
p00  p 0 > 0.This indicates that supplier A has an incentive
to deviate from the bid q* for generator 1. The same is true In the third experiment, the market conditions are the
for supplier B. This proves that the above configuration is same as those in the first experiment except for the auction
not at an equilibrium point. h pricing rule. By Proposition D, the Nash prices under loads
of 6000 MW and 8000 MW are 200. Under loads of
Proposition C (equilibrium under tight capacity con- 10,000 MW and 11,000 MW, there is no equilibrium and
straints). Let A 0 be a set Pof suppliers. For every supplier the rational bidding intervals are [400, 800] and [600, 800]
A, A 2 A 0 , the inequality j62A P j < DP holds. Suppose set respectively. The PAB experiment market clearing prices
A 0 is not empty, then the rational bid prices of all suppliers are summarized in Table 9.
would P occur in the interval ½max pA ; p. Here Comparing two experiment results suggests that in high
A2A0
DP 
j62A
Pj demand cases, the market clearing prices are more stable
pA ¼ PA
ð
p  cÞ þ c. Furthermore, there exists no under PAB than under MCP settlement even though the
equilibrium. prices are generally higher under the former settlement. A
closer inspection of the results reveals that an increase in
Proof. For supplier A 2 A 0 , there exists a price pA < p. If must-run capacity during high-load auctions reduces the
supplier A bids pA < pA, his maximum profit would be price volatility under PAB settlement. In low-load auc-
lower than his minimum profit under the bidding  p. Here tions, both settlements show the prices are very close to
pA is defined as follows: the cost. These results are consistent with the theoretical
X
p  cÞðDP 
ð P j Þ ¼ ðpA  cÞP A ; ð16Þ findings described previously. This indicates that MRR is
j62A an excellent index for predicting market behaviors.
P
DP  j62A P j
pA ¼ ð
p  cÞ þ c: ð17Þ 8. Conclusions
PA
Obviously, p P maxA2A0 pA > c. According to Lemma 1, if In this work we have developed price forecast models suit-
there exists an equilibrium, all suppliers bid the same price able for use in a pool-based electricity market. The motiva-
p P maxA2A0 pA . This means that there are several suppliers tion of this development is to facilitate risk assessment for
 Z. Hu et al. / Electrical Power and Energy Systems 30 (2008) 207–215
the transmission company that manages the network and
retail. The test results using actual market data demonstrate
that the models function reasonably well, and in particular,
they nicely take into account the impact of market power
on market clearing prices while requiring minimal computa-
tional efforts. The success is due to, in our opinion, a careful
application of neural network and game-theoretic concepts.
The second objective of this paper was to present exper-
imental results that justify our recent assertions. A key
finding is that an auction game under uniform pricing,
which is widely used world-wide, has multiple Nash equi-
librium points under high-load situations. We believe that
this explains the high volatility of actual market prices.
Acknowledgement
This work is partially supported by a Young Investiga-
tor Award from the Zhejiang Natural Science Foundation
(Grant Number: R503198) and the Zhejiang Power
Company.
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