Strategic offering in jointly-cleared energy and balancing pools with significant amounts of intermittent generation: an MPEC approach

Abstract

The large-scale integration of renewable generation has brought about a paradigm shift in power system operations, where the physics of the electricity system and priority dispatch policies imply a diminishing energy role for the conventional plant. Despite their increasingly important role as capacity sources, a consensual reform that compensates generators for offsetting intermittency has yet to be adopted. Dropping utilisation rates and prices may thus prompt firms to behave strategically in order to offset the losses incurred in the energy market. In this context, we consider the gaming incentives facing dominant firms and present a bi-level optimisation model, which maximises expected profits for the price-making leader, who anticipates the reactions of her price-taking followers in a Stackelberg game. The resulting nonlinear Mathematical Programme with Equilibrium Constraints is reduced into a Mixed Integer Programme, which is linearized by means of disjunctive constraints and solved to global optimality. Key to this work is to derive the optimal bids for the leader and assess the impact of strategic behaviour under uncertainty on locational marginal prices and profits in an energy-only market, which co-optimises energy and balancing operations. We employ a transmission-constrained dispatch to evaluate our method on a 29-node system for various wind penetration and demand levels and compare results against the competitive benchmark, which is cast as a two-stage stochastic programme with recourse. Results suggest that incumbents have compelling reasons to exploit economic withholding and transmission-related strategies, even under significant amounts of renewable generation. Additional simulations provide for the preliminary understanding of the impact of the parameter of flexibility on the leader’s strategy and profits; on-peak withholding causes large price distortions which offset the income erosion following the exposure to a less favourable balancing market, unlike off-peak withholding, where the diminished price-lifting ability connotes lower gains compared to the less flexible system.