J. D. Weber T. J . Overbye overbye @ uiuc.edu jd-weber @ uiuc.edu Department of Electrical and Computer Engineering University of Illinois at Urbana-Champaign Abstract Electricity markets involve suppliers (generators) and sometimes consumers (loads) bidding f or MWhr generation and consumption. In this market model, a central operator solves an Optimal Power Flow (OPF) based on the maximization of social welfare to determine the generation and load dispatch and system spot prices. In this structure, market participants will choose their bids in order to maximize their profits. This presents a two-level optimization problem in which participants try to maximize their profit under the constraint that their dispatch and price are determined by the OPF. This paper presents an efJici6nt numerical technique, using price and dispatch sensitivity information available from the OPF solution, to determine how a market participant should vary its bid portfolio in order to maximize its overall profit. The paper further demonstrates the determination of Nash equilibrium when all participants are trying to maximize their profit in this manner. Keywords: Electricity market, simulation, bidding strategy, optimal power flow, Nash equilibrium 1. Introduction Electricity markets throughout the world continue to be opened to competitive forces. The creation of mechanisms for suppliers, and sometimes consumers, to openly trade electricity is at the core of these changes. Most of the mechanisms being used and developed are based on spot pricing ideas. Good overviews and examples of spot pricing issues are found in [1]-[2]. All these spot pricing-based markets consist of suppliers submitting bids for electricity in the form of MW outputs and associated prices. Some markets, such as in England and the PJ M interconnection [3], consist of only supply-side bidding. Other markets, such as in New Zealand [4] and California [ 5] , also incorporate demand-side bidding, allowing the consumers in the market to react to pricing. In [6], a market simulation was developed where individuals submit supply andor demand bids to a central operator. The operator then solves an optimal power flow (OPF), with the objective of maximizing social welfare, to determine the generation and load dispatch, as well as all the spot prices. This paper will develop an algorithm allowing an individual to maximize their personal welfare in such a market. Possible equilibrium behavior can be determined by simulating a market in which all players use this new 0-7803-5569-5/99/$10.00 0 1999 IEEE algorithm. A simple example will be used to demonstrate behavior that would be expected in the electricity market. 2. Notation x : voltages, angles, and other variables in OPF problem s : supply vector (generation vector) d : demand vector (load vector) p : price vector Ci(s)=bj+c,sZ =supplier cost (function of supply) Bi ( d) =bp+cj z =consumer benefit (function of demand) Social Welfare = x Bi ( d ) - CC, ( s ) =B(d)-C(s) h(x,s,d) =0 : equality constraints for OPF including the power f l ow equations g(x,s,d) I O : inequality constraints for OPF including transmission line limits and voltage limits f (s,d,p) : individual's welfare taking into account the price paid or received for goods VL : the gradient of the OPF Lagrangian H : the Hessian of the OPF Lagrangian z =[ Sr dT all camurnen all suppliers xr A. ' p' : vector of all OPF variables 3. Electricity Market Setup using OPF Many electricity markets throughout the world include some form of supplier bidding in which suppliers submit MW outputs, along with associated prices. These bids generally take one of the two forms shown in Figure 1. Biock Bidding Cpntinuous Bid Curve f Price =p [$MWhr] P 3 T - - - - 1 - - Pz- ----- q PI- ! Price =p [$MWhr] v Figure 1 Supplier Block Bid and Continuous Bid Curve Additionally, some markets also include consumer bidding. Consumers can be modeled in a manner analogous to the suppliers. A demand function is used, which is mathematically similar to the supply function, except the demand function decreases as the price increases. In this paper, we assume a continuous bid curve model for both suppliers and consumers such as those seen in Figure 2. 682 Figure 2 Consumer and Supplier Bid Curves The setup of the electricity market simulation is the same as in [ 6] , and is briefly summarized here for convenience. For the market simulation, bids are taken as inputs to an OPF that solves the maximization of social welfare problem to determines supplies, demands and prices. These bids are limited to linear bids' as shown in Figure 2. Incorporating these bids into the OPF formulation involves converting the bid into a cost or benefit function, e.g. p( s , k) =k -s+ p,, 3 c ( s , ~ ) =k -s' +p,,,,,,~ r: 1 [2:, 1 [ 6] , [ 8] . The Lagrange multipliers of the OPF solution determine the spot prices, p. The suppliers in the market are paid the spot price at their node, and the consumers are charged the spot price. A thorough treatment of the mathematics involved in integrating supply and demand bids into the OPF formulation is provided in [ 8] . It should also be noted that bids are required to have a minimumpower of zero: no minimum generator outputs are allowed. This simplifying assumption is made to more concisely explain the algorithm. The algorithm could be augmented in the future to account for output limits by including a unit commitment solution prior to the OPF. Thus far we have restricted our market participants to either a single generator or a single load. In reality, any combination of several generators and several loads could constitute an economic entity; therefore, the word individual is used to describe a set of supplies and demands whose bidding is controlled by a single economic entity. 4. Individual Welfare Maximization The market setup fromthe previous section essentially defines the market rules for our system; however the variation in bidding will be limited to the variation of a single parameter, k, for each consumer or supplier as shown in Figure 3. This parameter will vary the bid around the true marginal curve of the supplier or consumer. The supply curve that reflects true marginal cost is defined as the linear function p( s ) =-S +p, , , while for the consumer, a true marginal curve is defined as p ( d ) =--d +p , . 1 m, 1 md bPrice=p . 4 price =p True Marginal enefit Curve Cost Curve Bid [MWI Figure 3 Bidding Variation for Supply and Demand While this limits market behavior, it will be shown in Section 7 that from an individual's viewpoint, the shape of this curve is not important for a single market solution. Note that modifying a bid in this manner is the same as multiplying the cost or benefit function used in the OPF by k. Here weassume that each individual seeks to maximizie its personal welfare. A single consumer's welfare is defined as the amount of benefit received from using the power, minus the expenses incurred in purchasing the power. Similarly, a single supplier's welfare is defined as the amount of revenue received from selling the power, minus the cost of supplying the power. An individual wants to maximize the total welfare of all the consumers and suppliers that it controls. =(-dTCdd+B:d)-&)-(srC,s+B:s)+ , - (1.s) Revenuer P BenefiIS Expenses CAIS;O- where Cd and C, : are diagonal matrices of quadratic coefficients for supply cost and demand benefit functions BdandB,: are vectors of linear coefficients for supply cost and demand benefit functions Note that an individual's welfare fls,d,h) is not an explicit function of its bid variable k. However f is an implied function of k since s, d, and h are all determined by an OPF solution which is a function of k. Thus s, d, and h are all implicit functions of the bids k. Assuming the individual has some estimate of what other individuals in the market are going to bid, the individual's goal is to maximize its welfare by choosing a bid which is a best response to the other individuals' bids. As a result, the maximization of an individual's welfare forms a two-level optimization problem where the individual maximizes its welfare subject to an OPF solution which maximizes social welfare based on all market. That is Max f (s,cl k) s.t. (s,d,k) are determined by k bids in the (2) ' While only allowing single-segment linear bids may seem limiting, the analysis of theCalifornia power market done in [7] shows that over time supply bid curves appear to be two-segment linear curves. Two-segments could be added to this development in the future, but [7] shows that linear bids are reasonably accurate. 683 5. Solution of Individual Welfare Maximization One approach to solving (2) is to represent the OPF maximization sub-problem by the Kuhn-Tucker necessary conditions as done in [9]. Thus the two-level optimization problem may be written as a standard optimization problem. This paper presents an alternative technique that makes minimal modifications to an existing OPF to solve (2). Consider solving the OPF problem for a given set of bids. Then from the information available at this OPF solution, the individuals profit sensitivity to variations in its bid can be used to determine a Newton-step that improves profits. This Newton-step is defined the customary way as shown in (3). af af Evaluation of (3) requires determination of and - , ak ak ( 5) Evaluation of (4) and ( 5 ) requires determination of ad as an a2d azk --- - -,and 7. Because s, d, and h are akakak ak2ak2 ak variables of the OPF solution, these derivatives can be determined directly from values available from the OPF solution. In a Newton-based OPF, an iteration of the mismatch equation Az =-H- (VL) is done until Az =0, where z =ET dr X A T r . Therefore the derivatives of s, d, and h can be found by taking derivatives of this mismatch equation. These can be found to be These equations can be simplified by recalling at an OPF solution Az =0, and that because of the structure of our problem, k shows up as a linear term in both the gradient a2H a2vL and the Hessian [IO], therefore?=O and = O . ak ak Thus (6) and (7) may be simplified to (9) aH az aZz dH -,aVL ak ak ak ak ak - =2H-I -H - =-2H-I __ and - aH are extremely sparse. The partial Both - ak ak avL derivative- is a matrix which has exactly one entry in each column, while - is 3-dimensional tensor that has exactly one diagonal element in each matrix as you move in the dimension corresponding to k. Because these are so sparse, the amount of arithmetic is much smaller than it would seem. Using (8) and (9) to substitute into (4) and ( 5) , use (3) to perform a Newton-step which improves an individuals welfare. The following algorithm is used to determine an individuals best bidding strategy. ak aH dk Algorithm: Individual Welfare Maximization 1. Choose an initial guess for vector k. 2. Solve the OPF maximization of social welfare given the individuals assumption of other individuals bids and the individuals guess at its own vector k. Use (3) to determine a step direction for vector k. If Ilkncw -k,II is below some tolerance stop, else go back to step 2. 3. 4. This algorithm will be effective as long as the binding inequalities of the OPF algorithm do not change. Changes in binding inequalities result in discontinuities of - af ak which means that the function f becomes non-differentiable. The non-differentiability can be overcome by recognizing that a change in binding inequality can be detected from other available information. From one side of the non- differentiable point, the value limited by the inequality approaches its limit. From the other side of the point, the Lagrange multiplier associated with the inequality approaches zero. This is shown in Figure 4. Welfare Limited value Lagrange multiplier I * kin, Increasing Figure 4 Binding Inequality Change Using this information, the Individual Welfare Maximization algorithm is modified so a multiplier reduces the step direction determined by (3) if this step direction 684 will step across a non-differentiable point. The multiplier instead tries to bring the answer directly to this non- differentiable point. 6. Market Simulation With the ability to determine an individuals best response to the market, a market simulation can now be performed to learn more about potential market behavior. For example, the determination of economic equilibrium points such as Nash equilibria [ 121 is of interest. Definition: Nash Eauilibrium An individual looks at its opponents behaviors The individual determines that its best response to its opponents behaviors is to continue its present behavior This is trueFOR ALL individuals in themarket To determine a Nash equilibrium the individual welfare maximization can be iteratively solved by all individuals until a point is reach where each individuals best response is to continue with the same vector of bids. A similar iterative technique for finding Nash equilibria was used in [ 1 11, although difference individual maximization was used. The following algorithm describes this process. Algorithm: Find Nash Eouilibrium 0 Start all individuals with a bid vector k =1. Run the Individual Welfare Maximization algorithm for each individual and update all bids Continue running this until individuals stop changing their bids 6.1. Market With No Constraints To demonstrate the Find Nash Equilibrium algorithm, consider the two-bus example with two suppliers and one consumer shown in Figure 5. B2(d2) =k,,(-0.04dz2 +30dzn g +jb =-j20.6 C,(S,) =k,,(0.01s12 +I OS , ) C,(S,) =k,,(0.01s,2 +l OS, ) Figure 5 Two-bus System: Two Suppliers and a Consumer Only consider the supplier bidding behavior for this example, therefore assume the consumer in this market always bids according to it true benefit function, i.e. l ~ 2 = 1.00. It is important to maintain the price-dependent demand. Otherwise, when a transmission line limit is added to the system, which will be done shortly, supplier #2 could have part of the constant load to serve with no competition. The solution for supplier #2 would be to bid k.2 equal to infinity. This is an unreasonable result. The Find Nash Equilibrium algorithm results in both suppliers bidding Is, = k2 =1.1502. This is called a pure strategy equilibrium [ 121 because the equilibrium is at a point where each bidder always bids that same value of k. Figure 6 shows the bid progression of the algorithm toward the equilibrium point. Figure 7 shows a complete solution to the problem with the optimal response of each supplier to any possible bid by the other supplier. The point where the two curves in Figure 7 meet is the Nash Equilibrium point. Iterations Figure 6 Bid Progression with no Line Limit z 1.4- ;Optimal Response of .- I Supplier #1 to Bids by #2 1 .o I 1 1.0 1.1 1.2 1.3 1.4 1.5 1.6 Variation of Supplier #l Bid Figure 7 Optimal Responses with no Line Limits 6.2. Market With Constraints To further demonstrate the algorithm, consider the system of Figure 5 again, but now add a constraint to the system: limit the flow on the transmission line to 80 MVA. The bid progression that results from this system case is shown in Figure 8. 1.6 I I I 0 5 10 15 20 25 Iterations Figure 8 Bid Progression with 80 MVA Line Limit 685 This does not result in a Nash equilibrium point, but limit cycle - like behavior. To better explain why no equilibrium point is reached, the optimal response curves over all possible bids by each individual are determined. These are shown in Figure 9. 1.1 1.15 1.2 1.25 1.3 1.35 1.4 1.45 1.5 1.55 1.6 Variation of Supplier ##1 Bid Figure 9 Optimal Responses with 80 MVA Line Limit Figure 9 shows that the optimal response curves for the two suppliers never intersect because of a discontinuity in the supplier #2 best response curve. In order to determine what is causing this discontinuity, supplier #2 profit vs. bid curves are created on either side of the discontinuity. These are shown in Figure 10. variation of Supplier Ws Bid whan k., =1.35 *e f - - a z Supplier #2 Bid Variation of Supplier WE Bid when k., I 1.40 Supplier #2 Bid Figure 10 Supplier #2 Profit vs. Bid on either side of the Discontinuous Point Figure 10 shows that the profit function for supplier #2 is non-convex, having two local maxima. When supplier #1 bids k1 = 1.3720, these local maxima have the same magnitude. At this point, supplier #2 has no preference between bidding either ks2 of 1.525 or 1.246. On either side of this point the optimal response Ijumps to the other local maximum. Ultimately, this is the reason that no pure Nash equilibrium exists. Thus, we have shown that the introduction of a transmission line constraint, even in a trivial two-bus system, eliminates our pure strategy equilibrium point. This does not mean that no Nash equilibria exist however. Only pure strategies have been considered. Mi xed strategies [ 121 are also possible. A brief definition of a mixed strategy in our application follows. Definition: Mi xed Strutenv An individual chooses several pure strategies and assigns a probability to each. The individual then submits these pure strategy bids according to their associated probabilities. Allowing the possibility of mixed strategy equilibria, one can easily generate a Nash equilibrium. For the previous example, one mixed strategy equilibrium is: Nash Equilibrium for Line Limited Case Supplier #1: Bid k,, =1.372 with Probability 1.00 Supplier #2: Bid ks2=1.246 with Probability 0.56 and ks2=1.525 with Probability 0.44 When supplier #1 bids k,l =1.372, supplier #2 has no preference between either bidding ks2 =1.246 or ks2 =1.525, thus bidding these two pure strategies with arbitrary probabilities is one optimal response. When supplier #2 bids these two pure strategies with the probabilities shown, the expected profit vs. bid curve for supplier #1 is as shown in Figure 11. In Figure 11, the maximum is indeed at a bid This shows that while pure strategy equilibria are eliminated by the inclusion of transmission limits, mixed strategy Nash equilibria still exist. of =1.372. G m Sup$er #;Bid 9, I2 Sup$er#iBld For IG2 E 1.246 with Prob 0.56 and ku =1.525 with Prob 0.44 I * $ 1 t YI 3 1 8, s 11 ( 25 ( 1 Supplier#l Bid Figure 11 Optimal Bids for Supplier #1 in Response to a Mixed-Strategy by Supplier #2 7. Generalizing the Bid Curves To this point, bidding in our electricity market has been limited to one dimension through changes in the multiplier, k, for each consumer and supplier. This does not allow the bidder to vary the slope and intercept of the bid curve independently. It can actually be shown that varying both slope and intercept will not result in increased personal welfare. To demonstrate this, the example with no line limits from Section 6.1 is considered. The optimal intercepts for several fixed slopes are determined, and the resulting optimal bid curves are shown in Figure 12. 686 Optimal Curves for several fixed slopes 300 250 s 2 100 150 % a - 0) 50 6 10 12 14 16 18 Price [$/MWhr] Figure 12 Optimal Curves for Several Fixed Slopes These optimal bid curves all intersect at the same point in the supply-price space. Also, for all bids the market solution is at this intersection point. This means that independently varying both the slope and intercept will not result in a higher increase in personal welfare. From this it is also learned that when performing the individual maximization, the individual is really trying to find a point in the supply/demand-price space that maximizes its profit. The individual is merely looking for a bid curve that crosses this point. The multiplier k used throughout this paper, is a very good variation parameter. Varying k will cover the entire supplyldemand-price space with positive values of slope and x-intercept, thus allowing the algorithm to find the desired point. While the bidding algorithm is only looking for a single point in this development, a future extension of this work could study the effect that uncertainty in the estimates of other individuals bids plays in moving this optimal point around. It is likely that the shape of the bid curve could be chosen to maximize personal welfare for small perturbations around the optimal point found in this paper. 8. Conclusions The algorithm developed has been successful in analyzing the small systems shown in the paper. It has been shown that iteratively using the objective of maximizing personal welfare can be an effective way of simulating electricity markets and studying the equilibrium behavior of the market. The recognition that an individual is looking for a point in the supplyldemand-price space is also important. A future improvement that must be achieved is allowing for the non-convexity of the individual welfare function as shown in Figure 10. The calculus-based algorithm presented here worked for small systems, but will be unable to effectively find global maxima for individual welfare on larger systems due to the non-convexity. Some sort of hybrid algorithm utilizing the work done here along with a genetic algorithm or simulated annealing technique will be investigated later. 9. Acknowledgements The authors would like to acknowledge the support of the Power Affiliates program of the University of Illinois at Urbana-Champaign and the Grainger Foundation. 10. References [l ] F.C. Schweppe, M.C. Caramanis, R.D. Tabors and R.E. Bohn, Spot Pricing of Electricily, Kluwer Academic Publishers, Boston, 1988. [2] H. Chao, S . Peck, A Market Mechanism for Electric Power Transmission, Journal of Regulatory Economics, J uly 1996, pp. 25-59. [3] The PJM website found at htta://www.pim.com. See section on Training for detailed information. [4] T. Alvey, D. Goodwin, X. Ma, D. Streiffert, D. Sun, A Security-Constrained Bid-Clearing System for the New Zealand Wholesale Electricity Market, IEEE Transactions on Power Apparatus and Systems, Vol. 13, No. 2, May 1998, pp. 340-346. [5] The California Power Exchange website found at htta:llwww.cal~x.corn. See section on About the PX for detailed information [6] J.D. Weber, T.J . Overbye, P.W. Sauer, Simulation of Electricity Markets with Player Bidding, Proceedings of Bulk Power Systems Dynamics and Control - IV Restructuring, Santorini, Greece, August 24-28, 1998, [7] P. Skantze, J . Chapman, Price Dynamics in the Deregulated California Energy Market, Proceedings of IEEE PES Society 1999 Winter Meeting, New York, New York, J an. 31 - Feb 4, 1999. [8] J.D. Weber, T.J . Overbye, C. DeMarco, Modeling the Consumer Benefit in the Optimal Power Flow, Decision Support Systems, Vol. 24, No. 3-4, March [9] J .B. Cardell, C.C. Hitt, W.W. Hogan, Market power and strategic interaction in electricity networks, Resource and Energy Economics, 1997, pp. 109-137. [lo] J.D. Weber, Implementation of a Newton-based Optimal Power Flow into a Power System Simulation Environment, M.S. Thesis from the University of Illinois, J anuary 1997. [ll]C.A. Berry, B.F. Hobbs, W.A. Meroney, R.P. ONeill, W.R. Steward, Analyzing Strategic Bidding Behavior in Transmission Networks, Game Theory Applications in Electric Power Markets, 99TP-136-0, IEEE PES Winter Meeting 1999, pp. 7-32. [12]D.M Kreps, A Course in Microeconomic Theory, Princeton University Press, Copyright 1990, Chapters 11 and 12. pp. 331-339. 1999, pp. 279-296. 687
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