Development of optimal bidding strategies for generation companies with risk management

Abstract

In the competitive electricity market environment, generation dispatching is bid-based and hence generation companies are required to compete with rivals for supplying power by bidding to the market. For generation companies competition implies opportunities for obtaining more profit as well as undertaking risks such as not being dispatched. As a result, it has become a major concern for generation companies of how to build optimal bidding strategies to maximize profits and at the same time to minimize risks incurred. In this work, a new framework is developed for building optimal bidding strategies with risks taken into account for competitive generation companies participating in a pool based single-buyer type electricity market. It is assumed that each generation company bids a linear supply function and that the system is dispatched to minimize the total purchasing cost of the single-buyer. Each generation company chooses the coefficients in the linear supply function for making tradeoff between two conflicting objectives: profit maximization and risk minimization. A stochastic optimization model for describing and two methods for solving this problem are presented, and a numerical example is employed for demonstrating the essential features of the developed model and methods.