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Electricity Market Modeling Trends

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Electricity Market Modeling Trends

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!

Mariano Ventosa*, Alvaro

Ba!llo, Andre! s Ramos, Michel Rivier

! Tecnologica,

!

Instituto de Investigacion

Universidad Pontificia Comillas, Alberto Aguilera 23, 28015 Madrid, Spain

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

Numerous publications give evidence of extensive effort

by the research community to develop electricity market

models adapted to the new competitive context.

This paper focuses on electricity generation market

modeling. Two main technical features determine the

complexity of such models: the product electricity

cannot be stored and its transportation requires a

physical link (transmission lines).

On the one hand, these features explain why

electricity market modeling usually requires the

representation of the underlying technical characteristics and limitations of the production assets. Pure

economic or nancial models used in other kind

of activities do a poor job of explaining electrical

market behavior. This paper deals specically with those

models that combine a detailed representation of the

physical system with rational modeling of the rms

behavior.

On the other hand, unless a high interregional or

international capacity interconnection exists or a very

proactive divestiture program is prompted (and this is

true for very few countries), only a handful of rms are

expected to participate in each wholesale electricity

market. Proper market models, in most cases, must deal

with imperfectly competitive markets, which are much

more complex to represent. This paper focuses on these

kinds of models.

ARTICLE IN PRESS

898

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.

Although there is a large number of papers devoted to

modeling the operation of deregulated power systems, in

this survey only a selection of the most relevant has been

considered for brevitys sake. An original taxonomy of

these models is also introduced in order to classify them

according to specic attributes: degree of competition,

time scope, uncertainty modeling, interperiod links,

transmission constraints and market representation.

These specic characteristics are helpful to understand

the advantages and limits of each model surveyed in this

paper. Finally, the paper identies which approaches are

most suitable for each purpose (i.e., planning studies or

market analysis), including risk management, which is

an increasingly important market issue.

Four articles, Smeers (1997), Kahn (1998), Hobbs

(2001) and Day et al. (2002), have already addressed the

classication of these approaches. The rst points out

how game theory-based models can be used to explore

relevant aspects of the design and regulation of liberalized energy markets. It also introduces the application of

multistage-equilibrium models in the context of investment in deregulated electricity markets. Kahn (1998)

surveys numerical techniques for analyzing market

power in electricity focusing on equilibrium models,

based on prot maximization of participants, which

assume oligopolistic competition. Two kinds of equilibria are mentioned in this survey. The commonest one is

based on Cournot competition, where rms compete in

quantity. In contrast, in the supply function equilibrium

approach (SFE), rms compete both in quantity and

price. The conclusion is that Cournot is more exible

and tractable, and for this reason it has attracted more

interest. More recently, Hobbs (2001) presents a brief

overview of the related literature, concentrating on

Cournot-based models. Finally, Day et al. (2002)

perform a more detailed survey of the power market

modeling literature with emphasis on equilibrium

models. The new survey presented in this paper does

not offer a signicantly different vision of the existing

electricity market modeling trends, but rather a complementary and unifying one. It constitutes an effort to

organize and characterize the existing proposals so as to

clarify their main contributions and shortfalls and pave

the way toward future developments.

The paper is organized as follows. Section 2

summarizes the classication scheme used in the survey.

Section 3 describes the publications related to optimization models, whereas Section 4 focuses on those related

to equilibrium models. Section 5 presents the publica-

proposed taxonomy for electricity market models. Section

7 points out the major uses of each modeling approach

and, nally, Section 8 provides some conclusions.

From a structural point of view, the different

approaches that have been proposed in the technical

literature can be classied according to the scheme

shown in Fig. 1.

Research developments follow three main trends:

optimization models, equilibrium models and simulation models. Optimization models focus on the prot

maximization problem for one of the rms competing in

the market, while equilibrium models represent the

overall market behavior taking into consideration

competition among all participants. Simulation models

are an alternative to equilibrium models when the

problem under consideration is too complex to be

addressed within a formal equilibrium framework.

Although there are many other possible classications

based on more specic attributes (see Section 6), the

different mathematical structures of these three modeling

trends establish a clearer division. Their various purposes

and scopes also imply distinctions related to market

modeling, computational tractability and main uses.

2.1. Mathematical structure

Optimization-based models are formulated as a single

optimization program in which one rm pursues its

maximum prot. There is a single objective function to

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

trends.

ARTICLE IN PRESS

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

constraints. In contrast, both equilibrium and simulation-based models consider the simultaneous prot

maximization program of each rm competing in the

market. Both types of models are schematically represented in Fig. 2, where Pf represents the prot of each

rm f Af1; y; F g; xf are rm fs decision variables; and

hf x and gf x represent rm fs constraints.

more suitable to long-term planning and market power

analysis since they consider all participants. The

modeling exibility of simulation models allows for a

wide range of purposes although there is still some

controversy as to the appropriate uses of agent-based

models. The major uses of existing electricity models are

presented in more detail in Section 7.

Equilibrium and simulation-based models represent

market behavior considering competition among all

participants. On the contrary, optimization models only

represent one rm. Consequently, in the latter models,

the market is synthesized in the representation of the

price clearing process, which can be modeled as

exogenous to the optimization program or as dependent

of the quantity supplied by the rm of interest.

2.3. Computational tractability

While complex mathematical programming methods

are required to deal with equilibrium-based models,

powerful and well-known optimization algorithms

bestowing a more detailed modeling capability can be

applied to solve optimization-based models. Simulation

models provide a more exible way to address the

market problem than equilibrium models although, in

general, they are based on assumptions that are

particular to each study.

2.4. Major uses

The previously mentioned differences in mathematical

structure, market modeling and computational tractability provide useful information in order to identify

the major uses of each modeling trend. For example, the

better computational tractability of optimization models

enables them to deal with difcult and detailed

problems, such as building daily bid curves in the

In this paper, approaches based on the prot

maximization problem of one rm are grouped together

into the single-rm optimization category. These models

take into account relevant operational constraints of the

generation system owned by the rm of interest as well

as the price clearing process. According to the manner in

which this process is represented, these models can be

classied into two types: price modeled as an exogenous

variable and price modeled as a function of the demand

supplied by the rm of study.

3.1. Exogenous price

The lowest level of market modeling represents the

price clearing process as exogenous to the rms

optimization program, i.e., the system marginal price

is an input parameter for the optimization program.

Consequently, as the price is xed, the market revenue

price times the rms productionbecomes a linear

function of the rms production, which is the main

decision variable in this approach. In view of that,

traditional Linear Programming (LP) and Mixed Integer

Linear Programming (MILP) techniques can be employed to obtain the solution of the model. Unfortunately, this type of optimization model can only

properly represent markets under quasi-perfect competition conditions because it neglects the inuence of the

rms decisions on the market clearing price.

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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

leading to similar conclusions.

2

A large-scale problem with complicating constraints is amenable

for a dual decomposition solution strategy, commonly known as

Lagrangian Relaxation approach.

conditional value at risk (CVaR). Similar to the models

proposed by Fleten and Unger, another stochastic

approach, which focuses on the solution method, is

presented in Pereira (1999). The resulting large-scale

optimization program is solved using the Benders

decomposition technique, in which the entire rms

maximization problem is decomposed into a nancial

master-problem and an operation sub-problem. While

the nancial master-problem produces nancial decisions related to the purchase of nancial assets

(forwards, options, futures and so forth), the operation

sub-problems decide both the dispatch of the physical

generation system and the exercise of nancial assets

providing feedback to the nancial problem. The

master-problem and sub-problems are solved using LP.

3.2. Price as a function of the firms decisions

In contrast to the former approaches in which the

price clearing process is assumed to be independent of

the rms decisions, there exists another family of

models that explicitly considers the inuence of a rms

production on price. In the context of microeconomic

theory, the behavior of one rm that pursues its

maximum prot taking as given the demand curve and

the supply curve of the rest of competitors is described

by the so-called leader-in-price model (Varian, 1992). In

such a model the amount of electricity that the rm of

interest is able to sell at each price is given by its

residual-demand function.3 Electricity market models of

this type can also be classied in two sub-groups

depending on whether a probabilistic representation of

the residual-demand function is used.

3.2.1. Deterministic models

The rst publication on electricity markets based on

the leader-in-price model is Garc!a et al. (1999). They

address the unit commitment4 problem of a specic rm

facing a linear residual-demand function. Given that the

market revenue is a quadratic function of the rms total

output, in order to allow for the use of powerful MILP

solvers, a piecewise linearization procedure of the

market revenue is proposed. Likewise, Ba!llo et al.

(2001) develop a MILP-based model focusing on the

problem of one rm with signicant hydroresources.

The Ba!llo model is more advanced in that it allows

non-concave market revenue functions by means of

3

From the point of view of one rm, its residual-demand function is

obtained by subtracting the aggregation of all competitors selling

offers from the demand-sides buy bids. The term residual-demand

function is also known as effective demand function.

4

The Unit Commitment Problem deals with the short-term schedule

of thermal units in order to supply the electricity demand in an efcient

manner. In this type of model, the main decision variables are

generators start-ups and shut-downs.

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M. Ventosa et al. / Energy Policy 33 (2005) 897913

a recent monograph on new developments in unit

commitment models (Hobbs et al., 2001).

3.2.2. Stochastic models

Unlike previous approaches, Anderson and Philpott

(2002) do not formulate the problem of optimal

production but rather the problem of constructing the

optimal offer curve of a generation rm. In order to

obtain the optimal shape of that offer curve, the

uncertain behavior of both competitors and consumers

must be taken into account. For this reason, they

represent uncertainty in the residual-demand function

by a probability distribution. This approach constitutes

an interesting starting point for the development of new

models that convert the offer curve into a protable risk

hedging mechanism against short-term uncertainties in

the marketplace. The thesis of Ba!llo (2002) advances the

Anderson and Philpott approach by incorporating a

detailed modeling of the generating system which

implies that offer curves of different hours are not

independent.

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

901

structure of SFE models turns out to be a set of

differential equations. As a result, most equilibriumbased models stem from the Cournot solution concept.

The publications devoted to these models concentrate

on four areas: market power analysis, hydrothermal

coordination,5 inuence of the transmission network

and risk assessment.

4.1.1. Market power analysis

Market power measurement was the earliest application to electricity markets of a Cournot-based model.

Borenstein et al. (1995) employed this theoretical market

model to analyze Californian electricity market power

instead of using the more traditional Hirschman

Herndahl Index (HHI) and Lerner Index, which

measure market shares and price-cost margins,

respectively. Later, Borenstein and Bushnell (1999)

have extended this approach by developing an empirical simulation model that calculates the Cournot

equilibrium iteratively: the prot-maximizing output

of each rm is obtained assuming that the production

of the remaining rms is xed. This is repeated for

each supplier until no rm can improve its prot.

Although this model has been successfully applied

to the Californian market, it shows some algorithmic

deciencies regarding convergence properties as

well as a simplistic representation of the hydroelectric

plants operation. Finally, a collection of modelsmost

of them based on Cournot competitionfor measuring market power in electricity can be found in

Bushnell et al. (1999). This paper summarizes in

tabular format these models, which have been

applied to the analysis of some of the most relevant

deregulated power markets: California, New England,

England and Wales, Norway, Ontario, and New

Zealand.

4.1.2. Hydrothermal coordination

Apart from market power analysis, Cournot competition has also been considered in hydrothermal models.

The rst publication on this subject is by Scott and Read

(1996), in the context of New Zealands electricity

market. Their model utilizes Dual Dynamic Programming (DDP), whereby at each stage the hydrooptimization problem is superimposed on a Cournot market

equilibrium. In this dual version of the dynamic

programming algorithm, the state space is dened by

the marginal water value (value of water) instead of the

storage level of the reservoir. Bushnell (1998) proposes a

similar model for studying the California market. Its

5

The Hydrothermal Coordination Problem provides the optimal

allocation of hydraulic and thermal generation resources for a specic

planning horizon by explicitly considering the fuel cost savings that

can be obtained due to an intelligent use of hydroreserves.

ARTICLE IN PRESS

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meaning of the rms marginal water value in a

deregulated framework. Bushnell points out that the

rms water value is related to the rms marginal

revenue instead of the traditional systems marginal

cost. Although Bushnells analytical formulation of the

market equilibrium conditions is more elegant, the Scott

and Read model contains a more detailed representation

of the physical system. Similar to the Bushnell approach,

Rivier et al. (2001) state the market equilibrium using

the equations that express the optimal behavior of

generation companies, i.e., by means of the rms

optimality conditions. Unlike both the Scott and Read

model and the Bushnell model, the Rivier et al. (2001)

approach takes advantage of the fact that the optimality

conditions can be directly solved due to its Mixed

Complementarity Problem6 (MCP) structure, which

allows for the use of special complementarity methods

to solve realistically sized problems. Kelman et al. (2001)

combine the Cournot concept with the Stochastic

Dynamic Programming technique in order to cope with

hydraulic inow uncertainty problems. However, they

do not mention how they deal with the fact that the

recourse function7 of the Dynamic Programming algorithm is non-convex in equilibrium problems. Barqu!n

et al. (2003) introduce an original approach to compute

market equilibrium, by solving an equivalent minimization problem. This approach is oriented to the mediumterm planning of large-size hydrothermal systems,

including the determination of water value and other

sensitivity results obtained as dual variables of the

optimization problem.

4.1.3. Electric power network

Congestion pricing in transmission networks is

another area in which Cournot-based models have also

played a signicant role. Both Hogan (1997) and Oren

(1997) formulate a spatial electricity model wherein

rms compete in a Cournot manner. Wei and Smeers

(1999) use a variational inequality8 (VI) approach for

computing the spatial market equilibrium including

generation capacity expansion decisions. They model

the electrical network considering only power-ow

conservation-equations since they omit Kirchhoffs

voltage law. This type of electric network model is

known as transshipment model.

More recently, Hobbs (2001) models imperfect

competition among electricity producers in bilateral

and POOLCO-based power markets as a Linear

6

The KarushKuhnTucker (KKT) optimality conditions of any

optimization problem can be formulated making use of a special

mathematical structure known as Complementarity Problem. A MCP

is a mixture of equations with a Complementarity Problem.

7

In the Hydrothermal Coordination Problem, the recourse function

is known as the future water value.

8

KKT conditions can also be formulated as a VI problem.

a congestion-pricing scheme for transmission in which

load ows are modeled considering both the rst and the

second Kirchhoff laws by means of a linearized

formulation. This type of electric network model is

known as DC model. In contrast to previous models, the

VI and LCP approaches are able to cope with large

problems. In all these models, it is assumed that the

generation units of each rm are located at only one

node of the networkwhich is, obviously, a particular

case. Unfortunately, since in the general case in which

each rm is allowed to own generation units in more

than one node, a pure-strategy equilibrium does not

exist, as it is pointed out by Neuhoff (2003).

4.1.4. Risk analysis

Finally, because of the difculty in applying traditional risk management techniques to electricity markets, only one publication has been identied that

explicitly addresses the risk management problem for

generation rms under imperfect competition conditions. Batlle et al. (2000) present a procedure capable of

taking into account some risk factors, such as hydraulic

inows, demand growth and fuel costs. Cournot market

behavior is considered using the simulation model

described in Otero-Novas et al. (2000), which computes

market prices under a wide range of scenarios. The

Batlle model provides risk measures such as value-atrisk (VaR) or prot-at-risk (PaR).

4.2. Extensions of cournot equilibrium

The assumption of generation companies behaving as

Cournot players has been extensively used to conduct a

diversity of analysis concerning the medium-term outcome of a variety of electricity market designs. The

possibility of formulating these models under the MCP/

VI framework and beneting from specic commercial

solvers capable of tackling large-scale problems has

signicantly contributed to the popularity of this

approach.

However, a number of drawbacks seem to question

the applicability of the Cournot model. The most

important one stems from the fact that under the

Cournot approach, generators strategies are expressed

in the terms of quantities and not in the terms of offer

curves. Hence, equilibrium prices are determined only

by the demand function being therefore highly sensitive

to demand representation and usually higher to those

observed in reality.10 This shortcoming seems to

9

A LCP is obtained when the KKT conditions are derived from an

optimization problem with quadratic objective function and linear

constraints.

10

In some respects, the models predicted prices are too high because

they do not take into account some of the external circumstances such

as stranded cost payments, new entry aversion or regulatory threats.

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M. Ventosa et al. / Energy Policy 33 (2005) 897913

alternative to represent competition in electricity markets (Rudkevich et al., 1998). Incorporating the

conjectural variations (CV) approach described in

traditional microeconomics theory (Vives, 1999) is

another way to overcome this limitation. The CV

approach is easy to introduce into Cournot-based

models. This approach changes the conjectures that

generators are expected to assume about their competitors strategic decisions, in terms of the possibility of

future reactions (CV). Two recent publications (Garc!aAlcalde et al., 2002; Day et al. 2002) suggest considering

this approach in order to improve Cournot pricing in

electricity markets. Garc!a-Alcalde et al. (2002) assume

that rms make conjectures about their residual demand

elasticities, as in the general CV approach, whereas Day

et al. (2002) assume that rms make conjectures about

their rivals supply functions. In the context of electricity

markets, this approach is already labeled as the

Conjectured Supply Function (CSF) approach.

903

of these studies. Green and Newbery (1992) analyze the

behavior of the duopoly that characterized the E&W

electricity market during its rst years of operation

under the SFE approach. It is assumed that each

company submits a daily smooth supply function. The

demand curve faced by generation companies is

extremely inelasticdemand-side bidding was almost

non-existentand varies over time since in the E&W

Pool offers were required to be kept unchanged

throughout the day. Interesting conclusions were

reached. For instance, in the case of an asymmetric

duopoly, it is shown that the large rm nds price

increases more protable and therefore has a greater

incentive to submit a steeper supply function. The small

rm then faces a less elastic residual demand curve and

also tends to deviate from its marginal costs. This was

previously pointed out by Bolle (1992), where the large

generation company suffers the consequences of the

curse of market power and indirectly causes an increase

of its rivals prots.

Klemperer and Meyer (1989) showed that, in the

absence of uncertainty and given the competitors

strategic variables (quantities or prices), each rm has

no preference between expressing its decisions in terms

of a quantity or a price, because it faces a unique

residual demand. On the contrary, when a rm faces a

range of possible residual demand curves, it expects, in

general, a bigger prot expressing its decisions in terms

of a supply function that indicates the price at which it

offers different quantities to the market. This is the SFE

approach which, originally developed by Klemperer and

Meyer (1989), has proven to be an extremely attractive

line of research for the analysis of equilibrium in

wholesale electricity markets.

Calculating an SFE requires solving a set of

differential equations, instead of the typical set of

algebraic equations that arises in traditional equilibrium

models, where strategic variables take the form of

quantities or prices. SFE models have thus considerable

limitations concerning their numerical tractability. In

particular, they rarely include a detailed representation

of the generation system under consideration. The

publications devoted to these models concentrate on

four topics: market power analysis, representation of

electricity pricing, linearization of the SFE model and

evaluation of the impact of the electric power network.

4.3.1. Market power analysis

The SFE approach was extensively used to predict the

performance of the pioneering England & Wales (E&W)

Pool, whose revolutionary design did not seem to t into

more conventional oligopoly models. The relatively

unimportant role played by the transmission network

The possibility of obtaining reasonable medium-term

price estimations with the SFE approach is considerably

attractive, particularly when conventional equilibrium

models based on the Cournot conjecture have proven to

be unreliable in this aspect mainly due to their strong

dependence on the elasticity assumed for the demand

curve. Indeed, the SFE framework does not require the

residual demand curve either to be elastic or to be

known in advance. Based on the assumption of inelastic

demand, further advances on the SFE theory have been

reported which increase its applicability. Rudkevich et al.

(1998) has obtained a closed-form expression that

provides the price for a SFE given a demand realization

under the assumption of an n-rm symmetric oligopoly

with inelastic demand and uniform pricing. Convergence problems due to the numerical integration of the

SFE system of differential equations are thus overcome.

This approach also allows to consider stepwise marginal

cost functions, which is more realistic than the convex

and differentiable cost functions typical of previous SFE

models.

4.3.3. Linear supply function equilibrium models

For numerical tractability reasons, researchers have

recently focused on the linear SFE model, in which

demand is linear,11 marginal costs are linear or affine

and SFE can be obtained in terms of linear or afne

supply functions. Green (1996) considers the case of an

asymmetric n-rm oligopoly with linear marginal costs

11

afne demand, whereas the term linear should be restricted to

afne functions with zero intercept.

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invariable over time. An SFE expressed in terms of

afne supply functions is obtained. Baldick et al. (2000)

extend previous results to the case of afne marginal

cost functions and capacity constraints. Solutions for

the SFE are provided in the form of piecewise afne

non-decreasing supply functions. They use this method

to predict the extent to which structural changes in the

E&W electricity industry may affect wholesale electricity

spot prices. Baldick and Hogan (2001) perform a

comprehensive review of the SFE approach. The

authors rst revisit the general SFE problem of an

asymmetric n-rm oligopoly facing a linear demand

curve (no explicit assumption is made concerning the

rms marginal costs) and show the extraordinary

complexity of obtaining solutions for the system of

differential equations that results. In particular, they

highlight the difculty of discarding infeasible solutions

(e.g., equilibria with decreasing supply functions). An

iterative procedure to calculate feasible SFE solutions is

proposed and extensively used to analyze the inuence

of a variety of factors such as capacity constraints, price

caps, bid caps or the time horizon over which offers are

required to remain unchanged.

4.3.4. Electric power network

In Ferrero et al. (1997), generation companies are

assumed to offer one afne supply curve at each of the

nodes in which their units are located. Transaction costs

are calculated based on Schweppes spot pricing theory,

including the inuence of transmission constraints. A

nite number of offering strategies are dened for each

generation company and an exhaustive enumeration

solution process is proposed. Berry et al. (1999) use an

SFE model to predict the outcome of a given market

structure including an explicit representation of the

transmission network. Forcing supply functions to be

afne typically alleviates the complexity of searching for

a solution. Different conceptual approaches have been

adopted to obtain numerical solutions for this family of

models. In general, no existence or uniqueness conditions are derived. Hobbs et al. (2000) propose a model in

which the strategy of each rm takes the form of a set of

nodal afne supply functions. The problem is structured

in two optimization levels and therefore the solution

procedure is based on Mathematical Programming with

Equilibrium Constraints (MPEC).

In spite of the variety of modeling proposals, it is

possible to identify a number of attributes that can be

used to establish a comparison between different SFE

approaches. Some of these attributes refer to the market

representation adopted by each author, such as the

possibility of considering asymmetric rms and the

assumptions made about the shape of the marginal cost

curves, the supply functions or the demand curve.

Others attributes refer to the model of the generation

network (e.g., transmission constraints). Finally, the

solution method used by each author and the numerical

cases addressed are also two relevant features. In order

to illustrate the evolution of this line of research, Table 1

presents a summary of the works that have been

reviewed in this section.

In conclusion, the SFE approach presents certain

advantages with respect to more traditional models of

imperfect competition. In particular, it appears to be an

appropriate model to predict medium-term prices of

electricity, given that it does not rely on the demand

function,12 as the Cournot model, but on the shape of

the equilibrium supply functions decided by the rms. In

addition to this, rms strategies do not need to be

modied as demand evolves over time. Quite the

opposite, supply functions are specically conceived to

represent the rms behavior under a variety of demand

scenarios. This exibility, however, is accompanied by

signicant practical limitations concerning numerical

tractability. To date, only under very strong assumptions have SFE problems been solved when applied to

real cases. Given that SFE shortcomings are well

documented, only the main disadvantages will be cited

here. Firstly, in general, multiple SFE may exist and it is

not clear which of them is more qualied to represent

rms strategic behavior. Secondly, except for very

simple versions of the SFE model, existence and

uniqueness of a solution are very hard to prove. Thirdly,

closed-form expressions of a solution are very rarely

obtained. Consequently, numerical methods are needed

to solve the system of differential equations, thus

increasing the computational requirements of this

approach. Moreover, some of this systems solutions

may violate the non-decreasing constraint that supply

functions must observe. This leads to ad hoc solution

procedures that usually present convergence problems.

Needless to say, transmission constraints are only

considered in extremely simplied versions of the SFE

model. Nevertheless, research efforts have recently

produced encouraging results that may ultimately

increase the applicability of this approach.

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.

ARTICLE IN PRESS

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

Twice continuously differentiable

Afne

Afne

Differentiable

Piecewise linear

Piecewise linear non-decreasing

Afne

Afne

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

905

units with complex constraints only contributes to

complicate the situation.

Simulation models are an alternative to equilibrium

models when the problem under consideration is too

complex to be addressed within a formal equilibrium

framework. Simulation models typically represent each

agents strategic decision dynamics by a set of sequential

rules that can range from scheduling generation units to

constructing offer curves that include a reaction to

previous offers submitted by competitors. The great

advantage of a simulation approach lies in the exibility

it provides to implement almost any kind of strategic

behavior. However, this freedom also requires that the

assumptions embedded in the simulation be theoretically justied.

5.1. Simulation models related to equilibrium models

In many cases, simulation models are closely related

to one of the families of equilibrium models. For

example, when in a simulation model rms are assumed

to take their decisions in the form of quantities, the

authors will typically refer to the Cournot equilibrium

model in order to support the adequacy of their

approach.

Otero-Novas et al. (2000) present a simulation model

that considers the prot maximization objective of each

generation rm while accounting for the technical

constraints that affect thermal and hydrogenerating

units. The decisions taken by the generation rms are

derived with an iterative procedure. In each iteration,

given the results obtained in the previous one, every rm

modies its strategic position with a two-level decision

process. First, each rm updates its output for each

planning period by means of a prot maximization

problem in which market clearing prices are held xed

and a Cournot constraint is included limiting the

companys output. Subsequently, the price at which

the company offers the output of each generating unit in

each planning period is modied, according to a

descending rule. New market clearing prices are

calculated based on these offers and on the evolution

of demand, which is assumed to be inelastic.

Day and Bunn (2001) propose a simulation model,

which constructs optimal supply functions, to analyze

the potential for Market Power in the E&W Pool. This

approach is similar to the SFE scheme, but it provides a

more exible framework that enables us to consider

actual marginal cost data and asymmetric rms. In this

model, each generation company assumes that its

competitors will keep the same supply functions that

they submitted in the previous day. Uncertainty about

the residual demand curve is due to demand variation

throughout the day. The optimization process to

construct nearly optimal supply functions is based on

ARTICLE IN PRESS

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formal mathematical programming problem. The

authors compare the results of their model for a

symmetric case with linear marginal costs to those

obtained under the SFE framework, which turns out to

be extraordinarily similar.

Competition

Oligopoly

Simulation provides a more exible framework to

explore the inuence that the repetitive interaction of

participants exerts on the evolution of wholesale

electricity markets. Static models seem to neglect the

fact that agents base their decisions on the historic

information accumulated due to the daily operation of

market mechanisms. In other words, agents learn from

past experience, improve their decision-making and

adapt to changes in the environment (e.g., competitors

moves, demand variations or uncertain hydroinows).

This suggests that adaptive agent-based simulation

techniques can shed light on features of electricity

markets that static models ignore.

Bower and Bunn (2000) present an agent-based

simulation model in which generation companies are

represented as autonomous adaptive agents that participate in a repetitive daily market and search for

strategies that maximize their prot based on the results

obtained in the previous session. Each company

expresses its strategic decisions by means of the prices

at which it offers the output of its plants. Every day,

companies are assumed to pursue two main objectives: a

minimum rate of utilization for their generation

portfolio and a higher prot than that of the previous

day. The only information available to each generation

company consists of its own prots and the hourly

output of its generating units. As usual in these models,

demand side is simply represented by a linear demand

curve. This setting allows the authors to test a number of

market designs relevant for the changes that have

recently taken place in E&W wholesale electricity

market. In particular, they compare the market outcome

that results under the pay-as-bid rule to that obtained

when uniform pricing is assumed. Additionally, they

evaluate the inuence of allowing companies to submit

different offers for each hour, instead of keeping them

unchanged for the whole day. The conclusion is that

daily bidding together with uniform pricing yields the

lowest prices, whereas hourly bidding under the pay-asbid rule leads to the highest prices.

In addition to the classication presented in Sections

25, which is based on the mathematical structure of

each model, electricity market models can be categorized

Monopoly

Perfect

Competition

Leader in

Price

Nash

Equilibrium

(Cournot and

SFE)

Nash

Equilibrium

(Cournot and

Stackelberg)

Minimization of the Whole System

Short Term

(Days)

Medium Term

(Months)

Time

Scope

Long Term

(Years)

and time scope.

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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M. Ventosa et al. / Energy Policy 33 (2005) 897913

907

xed.

As previously mentioned, under imperfect competition conditions, the time scope of the model denes

different market modeling approaches. To be specic, in

the case of short-term operation (one day to one week),

the experience drawn from the literature surveyed in this

paper suggests that the best way to represent the market

is the leader-in-price model from microeconomics theory

(Garc!a et al., 1999; Ba!llo et al., 2001; Anderson and

Philpott, 2002; Ba!llo, 2002). In the leader-in-price

model, the incumbent rm pursues its maximum prot

taking into account its residual demand function that

relates the price to its energy output. The most

controversial assumption of this theoretical model lies

on the static perspective that the residual demand

function provides about other agents. An intuitive

explanation about the suitability of this conjecture in

short-term models is that the shorter the time scope

considered, the more consistent this conjecture becomes.

In the medium-term case (1 month to 1 year), the vast

majority of the models are based on both Cournot

equilibrium (Scott and Read, 1996; Bushnell, 1998;

Rivier et al., 2001; Kelman et al., 2001; Barqu!n et al.,

2003; Otero-Novas et al., 2000) and SFE (Green and

Newbery, 1992; Bolle, 1992; Rudkevich et al., 1998;

Baldick and Hogan, 2001).

Finally, microeconomics suggests that the Stackelberg

equilibrium may t better than other oligopolistic

models with the long-term investment-decision problem

due to its sequential decision-making process. There is a

leader rm that rst decides its optimal capacity; the

follower rms then make their optimal decisions

knowing the capacity of the leader rm (Varian, 1992).

Up to now, there are only a few articles (Ventosa et al.,

2002; Murphy and Smeers, 2002) devoted to represent

investment in imperfect electricity markets. In both

publications, a comparison between the Cournot equilibrium and Stackelberg equilibrium for modeling investment decisions is conducted. One conclusion is that

although from a theoretical point of view both models

are based on different assumptions, from a practical

point of view there are minor differences in most results.

The Stackelberg model of Ventosa et al. turns out to

have the structure of a MPEC due to the fact that there

is only one leader rm. In contrast, the Stackelbergbased model of Murphy and Smeers has the structure of

an Equilibrium Problem with Equilibrium Constraints

(EPEC) because more that one leader rm may exist.

The EPEC model is more general although it is also

more difcult to manage.

depend on random variables such as generators forced

outages, hydraulic inows and levels of demand. Moreover, in a competitive context, new sources of uncertainty must be considered due to both strategic

behavior of competitors and fuel price volatility.

According to the manner in which uncertainty is

represented, models can be classied into probabilistic

when the uncertain nature of random variables is

incorporated using probabilistic distributionsand deterministicwhen only the expected value of such

variables is considered. Needless to say, probabilistic

models result in large-scale stochastic problems that

require complex solution techniques.

In regard to the representation of the stochasticity of

demand within the context of electricity markets, the

best examples are those models based on the SFE

(Fig. 4) (Green and Newbery, 1992; Bolle, 1992;

Rudkevich et al. 1998) since they all consider uncertainty in demand. Based on a probabilistic version of the

price-leadership model, the Ba!llo model (2002) not only

considers the uncertainty in demand but also in

competitors behavior. Finally, Fleten et al. (2002) and

Unger (2002) models focus on uncertainty in prices and

hydraulic inows under pure competition assumptions,

while Kelman et al. (2001) considers a Cournot framework.

of transmission constraints divides electricity market

models into two main types: single-node models and

transmission network models.

market models is in the eld of forecasting the market

The time scope considered in planning studies is

typically split into intervals commonly known as

periods. In electricity generation, there are many costs

and decisions that, when addressed within a certain time

scope, involve the scheduling of resources in the multiple

intermediate periods. For example, long-term studies

are typically oriented to derive optimal annual management policies for hydroreserves that must consider the

dynamic process of inows and thus take the form of a

set of monthly or weekly operation decisions. Similarly,

short-term models must take into account the intertemporal constraints implicit in thermal unit commitment decisions.

SFE-based models do not usually consider these

interperiod effects. In contrast, almost all the rest of

models reviewed in this paper, such as those devoted to

optimal offer curve construction, hydrothermal coordination and capacity expansion problems, focus on the

tradeoff of scheduling resources across time.

6.5. Transmission constraints

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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.

consider the transmission network; nevertheless, there

are good examples of transmission models. In terms of

network modeling, some authors consider a transshipment network that omits Kirchhoffs voltage law (Wei

and Smeers, 1999) although their model allows for intertemporal constraints regarding investment decisions

(Fig. 4). Other authors consider both of Kirchhoffs

laws (Berry et al., 1999; Hobbs et al., 2000; Hobbs, 2001)

by means of a linearized DC network whereas Ferrero

et al. (1997) use a nonlinear AC network model. From a

computational point of view, only two of these

approaches (Hobbs, 2001; Wei and Smeers, 1999)

permit solving realistically sized problems.

6.6. Generating system modeling

A high degree of realism regarding the physical

modeling of generating systems involves the representation of technical limits affecting generators as well as the

consideration of accurate production cost functions of

thermal units.

As shown in Fig. 5, optimization-based models for

individual rms achieve a high level of accuracy in

system modeling due to the powerful LP and MILP

techniques available to solve them. These models

consider in detail the relevant technical constraints

affecting generation units. In addition, these models

consider every individual generation unit of interest in a

non-aggregated manner. For instance, medium-term

Unger (2002) and Kelman et al. (2001) consider not only

the hydroenergy constraints implicit in the management

of water reserves but also the hydraulic inow uncertainty. On the other hand, short-term models such as

Garc!a et al. (1999) and Ba!llo (2002) consider in detail

inter-temporal constraints, such as ramp-rate limits, and

incorporate binary variables to deal with decisions such

as the start-up and shut-down of thermal units.

In the case of equilibrium models, two of the revised

approachesthe Otero-Novas model (2000), which

combines a simulation algorithm with optimization

techniques, and the Rivier model (2001), which is solved

by complementarity methodsreach a degree of realism

similar to that of optimization models. Both models are

able to manage realistically sized problems considering

every generation unit as independent with its particular

constraints. Scott and Read (1996) and Bushnell (1998)

are considered to have an intermediate level in terms of

generation system modeling since they take into account

independent units but they are not capable of solving

large problems. Finally, it is very rare that SFE-based

models include a detailed representation of the generation system due to their numerical tractability limitations.

6.7. Market modeling

The last attribute considered in this taxonomy is

related to the market model under consideration. Pure

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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.

(2002), Pereira (1999)are the simplest in terms of

market modeling since they consider the price clearing

process as exogenous to the optimization problem.

Models based on the leader-in-price conceptGarc!a

et al. (1999) and Ba!llo (2002)are considered to have

an intermediate level of complexity since they take into

account the inuence of the rms production on prices

by means of its residual demand function. Finally, the

most complex market models are those based on

imperfect market equilibrium as they take into account

the interaction of all participants.

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

risk management models are also based on optimization

due to their complexity and size.

In contrast, when long-term planning studies are

conducted, equilibrium models are more suitable because the longer the time scope of the study, the lower

the requirement for detailed modeling capability, and

the more signicant the response of all competitors.

Therefore, the majority of models devoted to yearly

economic planning and hydrothermal coordination are

Cournot-based approaches, which provide more realism

in the representation of physical constraints than SFEbased approaches, that have numerical tractability

limitations.

As in the case of long-term studies, in market power

analysis and market design, it is also necessary to

consider the market outcome resulting from competition

among all participants. Consequently, equilibrium

models and simulation models are the best alternative

to traditional anti-trust tools based on indices such as

HirschmanHerndahl Index (HHI) and Lerner Index.

Finally, regarding the analysis of congestion management in transmission networks, Cournot and SFE

equilibrium models are able to simultaneously consider

power ow constraints and the competition of several

rms at each node.

In conclusion, Table 3 summarizes the main characteristics of the most signicant models referred to in

previous sections. The models are classied into eight

categories depending on their market model.13 Within

13

CSF: Conjectured Supply Function approach and CV: Conjectural Variations approach.

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Table 2

Major uses of electricity market models

Major use

One-rm optimization

models

Simulation models

Risk management

(2002) and Pereira (1999)

Unit commitment

Rajamaran et al. (2001)

Short-term hydrothermal

coordination

Strategic bidding

(2002) and Ba!llo (2002)

(1998), Borenstein et al. (1995), Borenstein and

Bushnell (1999), Baldick et al. (2000) and

Baldick and Hogan (2001)

Market design

and Hogan (2001)

Long-term hydrothermal

coordination

et al. (2001), Kelman et al. (2001) and Barqu!n

et al. (2003)

(2002)

Congestion management

Hobbs (2001), Wei and Smeers (1999) and Berry

et al. (1999)

Other columns are related to major use, main features of

the model, numerical solution method,14 problem size15

of the case study and the regional market considered.

This paper presents a survey of the literature on

electricity market models showing that there are three

main lines of development: optimization models, equilibrium models and simulation models. These models

14

Benders: Benders Decomposition, DP: Dynamic Programming,

Enumeration: Exhaustive Enumeration, EPEC: Equilibrium Program

with Equilibrium Constraints, Heuristic: Ad hoc Heuristic Algorithm,

LCP: Linear Complementarity Problem, LP: Linear Programming,

MCP: Mixed Complementarity Problem, MIP: Mixed Integer

Programming, MPEC: Mathematical Programming with Equilibrium

Constraints, NI: Numerical Integration, NLP: Non-Linear Programming, Simulation: Simulation Scenario Analysis, and VI: Variational

Inequality.

15

Small: less than 100 variables, Medium: between 100 and 10,000

variables, and Large: more than 10,000 variables.

representation, computational tractability and major

uses.

In the case of single-rm optimization models,

researchers have been developing models that address

problems such as the optimization of generation

scheduling or the construction of offer curves under

perfect and imperfect competition conditions. At present, they are working on two different challenges. On

the one hand, they are tackling the cutting edge problem

of converting the offer curve of a generating rm into a

robust risk hedging mechanism against the short-term

uncertainties due to changes in demand and competitors

behavior. On the other hand, they are developing risk

management models that help rms to decide their

optimal position in spot, future and over-the-counter

markets with an acceptable level of risk.

Models that evaluate the interaction of agents in

wholesale electricity markets have persistently stemmed

from the game-theory concept of equilibrium. Some of

these models represent the equilibrium in terms of

variational inequalities or, alternatively, in the form of a

complementarity problem, providing a framework to

Table 3

Major uses and main features of the reviewed market models

Year Major use

Main feature

Perfect

Competition and

Exogenous price

Fleten et al.

Pereira et al.

Rajamaran et al.

Unger

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

Ba!llo et al.

Anderson and Philpott

Ba!llo et al.

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

Bolle

Rudkevich et al.

1992 Market power analysis

1998 Market power analysis

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

Bushnell

Borenstein and Bushnell

Batlle et al.

Otero-Novas et al.

Kelman et al.

Rivier et al.

Barqu!n et al.

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

2002 Capacity expansion planning

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

2002 Congestion management

2000 Market design

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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