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2, MAY 2006

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Nash Equilibrium in Strategic Bidding: A Binary Expansion Approach

Luiz Augusto Barroso, Member, IEEE, Rafael Dix Carneiro, Srgio Granville, Mario V. Pereira, Member, IEEE, and Marcia H. C. Fampa

AbstractThis paper presents a mixed integer linear programming solution approach for the equilibrium problem with equilibrium constraints (EPEC) problem of nding the Nash equilibrium (NE) in strategic bidding in short-term electricity markets. A binary expansion (BE) scheme is used to transform the nonlinear, nonconvex, NE problem into a mixed integer linear problem (MILP), which can be solved by commercially available computational systems. The BE scheme can be applicable to Cournot, Bertrand, or joint price/quantity bidding models. The approach is illustrated in case studies with congurations derived from the 95-GW Brazilian system, including unit-commitment decisions to the price-maker agents. Index TermsElectricity pool market, game theory, market models, mixed-integer linear programming (MILP), Nash equilibrium (NE).

I. INTRODUCTION

NE of the key components in liberalized power sectors [1] is the short-term electricity market, where hourly energy prices are set as follows: 1) at the end of each day, generators and loads bid hourly prices and quantities for the next 24 h; 2) an economic dispatch is then simulated for each hour, where a clearing price is adjusted until the total energy generated equals the total energy consumed; and 3) the nal clearing price, or spot price, is used to remunerate/charge all energy sales/purchases. The existence of a bid-based market poses complex challenges for both market agents and regulators. For the agent, the question is how to develop bidding strategies that maximize their revenues. Conversely, regulators will be interested in analyzing those bidding strategies, in order to prevent market power abuses. The basic challenge for a strategic bidder is that its revenue depends on the bids of all other agents, who also act strategically. Thus, all bidders endeavor simultaneously to maximize their respective revenues, trying to anticipate and counteract the strategic behavior of theirs competitors. This type of interaction is usually modeled by game-theoretic concepts [2], in particular Nash equilibrium (NE), and has been extensively used in the studies of competitive energy markets (see, for example, [3] and [4]).

Manuscript received October 27, 2004; revised October 16, 2005. Paper no. TPWRS-00568-2004. L. A. Barroso is with Power Systems Research, Rio de Janeiro, Brazil and is also with the Systems Engineering and Computer Science Program, COPPE/UFRJ, Rio de Janeiro, Brazil (e-mail:luiz@psr-inc.com). R. D. Carneiro is with Princeton University, Princeton, NJ 08544 USA (e-mail: rdc@princeton.edu). S. Granville and M. V. Pereira are with Power Systems Research, Rio de Janeiro, Brazil (e-mail:psr@psr-inc.com). M. H. C. Fampa is with Instituto de Matemtica/COPPE-Sistemas, UFRJ, Rio de Janeiro, Brazil (e-mail: fampa@cos.ufrj.br). Digital Object Identier 10.1109/TPWRS.2006.873127

The objective of NE is to nd a set of bids with the following property: no agent can individually improve its revenues by modifying its bid, if the remaining agents offer the equilibrium bids. If the usual game-theoretical assumptions are met (rational behavior, complete and perfect information) and there is only one solution to the NE conditions, then agents would be expected to offer these equilibrium bids. Although real-life bidding conditions are unlikely to fully match those theoretical assumptions, the NE approach remains a powerful tool, both for devising bidding strategies and for simulating the effect of countermeasures for market power mitigation. The objective of this paper is to present a solution scheme for the calculation of Nash equilibria in bid-based electricity markets. As it will be shown, the NE conditions correspond to nding a feasible solution to a set of I constraints, where I is the number of strategic bidding agents (those that can inuence the market prices with their bids, or price makers). The major difculty is that the right-hand side of each conis a nonlinear, nonconvex optimization substraint problem, where agent determines its maximum-revenue bids, given assumptions about all the other agents bids. Most proposed solution approaches to the NE problem use either 1) an iterative scheme [5], [6]: successively freeze the bids of all agents but one, solve the revenue maximization for this remaining agent, and repeat the iterative process until there is no change; or 2) apply the KarushKuhnTucker (KKT) optimality conditions to each optimization subproblem, in order to transform it into a set of nonlinear constraints; and thus solve the whole set of constraints simultaneously, using specialized equilibrium algorithms [7][12]. Both schemes have been successfully applied to a wide range of situations. However, some limitations have also been identied, such as convergence difculties in the iterative case, and the nonguarantee of an optimal solution with the KKT conditions due to the problem nonconvexities. Also, it may be difcult to identify multiple Nash equilibria. The NE solution methodology described in this paper tries to alleviate some of the above limitations, introducing the followingapproach:1)replacethecontinuousbidsbyasetofdiscrete values; this allows the enumeration of the solutions of each optimization subproblem in the right-hand side (RHS) of the NE constraints; 2) in the previous step, we transformed the NE problem into a set of nonlinear integer constraints; we now apply a binary expansion (BE) transformation [13] to the nonlinear terms, thus obtaining a set of mixed integer linear programming (MILP) constraints; and 3) we use a commercial solver to nd a feasible solution to the MILP constraint set, which will be the NE.

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Because all constraints are represented in an MILP environment, it is possible to model a wide range of features, such as: 1) unit commitment in the calculation of operating costs; and 2) different bidding models: joint price/quantity, Bertrand (agents bid prices and full capacities) or Cournot (agents bid quantities at a zero price), among others and 3) identication and enumeration of multiple Nash equilibria. The objective of this paper is then to introduce the framework for the aforementioned modeling approach in an energy-only bid-based electricity market. In this paper, the system to be analyzed still does not consider the transmission network: a single node or zonal approach, where all generators belonging to the companies being optimized are in the same zone, is assumed. Spot market auctions neglecting transmission constraints (or with zonal pricing schemes) are observed in some electricity markets worldwide, such as in Spain, the U.K., Norway, China, Colombia, Peru, and Brazil. Coupling constraints (such as ramping, fuel, and emission constraints) or bids in other markets, except an energy-only market, are also neglected. Finally, because of the MILP environment, the model can take advantage of recent improvements of MILP solution techniques but also can suffer from the computational complexity of integer programs. This will be discussed further in this paper. The remainder of this paper is organized as follows. In Section II, we present an overview of the strategic bidding problem and NE concepts. In Section III, we formulate the Nash model as a nonlinear program and transform it into an MILP model. Section IV discusses extensions to the Nash-MILP model. Section V presents an application of the methodology in a case study derived from the Brazilian system, and in Section VI, the main conclusions are summarized. II. STRATEGIC BIDDING AND NE For ease of presentation, we present in Sections II and III a simple NE formulation: one single stage, no transmission constraints, and a Cournot bidding model, where strategic agents only bid quantities. More complex models and extensions are discussed in Section IV. A. Agents and Bids Price maker agents (who can affect market prices with their bids) are indexed by . Price takers (who cannot . affect prices) are indexed by As shown in [14], the optimal price/quantity bid for each price , where is the variable production cost, and taker is is the available capacity. In the Cournot model [2], each price at a zero price. maker bids quantity B. Economic Dispatch (ED) Given the price/quantity bids of all agents, a linear optimization model determines the most economic production schedule that meets an hourly load (assumed to be price-inelastic) (1) subject to multiplier (2) (3)

Equation (2) represents load supply, and constraint (3) represents limits on generation. Associated to each constraint (2), is the spot price, i.e., the (3), there is a simplex multiplier: is the marginal marginal cost of increasing load supply, and benet of increasing agent s quantity bid. Because the price makers bid a zero price, they are fully used (dispatched) in the ED. C. Net Revenues Each price maker receives a gross operating revenue ($) given by the product of its energy production (MWh) and spot price ($/MWh). The net revenue is obtained by deducting the agents operation cost (4) where represents the I-dimensional vector of quantity bids of all price makers, and is the unit operation cost ($/MWh) of agent . D. Bidding Strategy Suppose that the quantity bids of all agents, except agent , are . Agent s objective is to determine known: the bid quantity that maximizes its net revenue (5) subject to (6) represents the maximization of for all feawhere sible values of , and is agent s maximum generation capacity. It is implicitly assumed that is greater than zero. . This Note that problem (5)(6) has a nonlinear term, is nonlinearity is made more complex because the spot price a multiplier associated to the load supply constraint in the EDs optimal solution [see (1)(3)]. The ED as modeled in (1)(3) is a linear programming problem; hence, it is convex. Consequently, we can use the KKT complementarity conditions as shown in [13], and both variables and simplex multipliers of the ED can be written simultaneously, as shown in the following: (7) (8) (9) (10)

(11) Agent s bidding problem then becomes the maximization of (5), subject to constraints (6)(11). As seen in [13], [15], and [16], this problem is a mathematical program with equilibrium constraints (MPEC) that is difcult to solve because of the prodin the objective function (5) and in constraint (11), ucts which introduce nonconvexities. E. Nash Equilibrium (NE) In the agent s bidding problem (5)(11), we assumed that remained frozen. As mentioned in the the bids of agents

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Introduction, all agents endeavor simultaneously to maximize their respective revenues, trying to anticipate and counteract the strategic behavior of their competitors. Also as mentioned, the NE conditions represent the result of this competition process and are modeled as follows. Let be a vector of equilibrium bids. If all agents bid the equilibrium quantities, agent s optimal bid will also be . The NE condition for agent translates into the following constraint: (12) represents the MPEC bidding problem where (5)(11). The NE solution is given by any feasible bid vector that meets simultaneously constraint (12) for all agents (13) (14)

C. BE Transformation In this step, we use a BE scheme to transform the products in (5) and (11) into mixed linear integer conof variables straints. The BE scheme was introduced in [13] as a solution approach to the problem of strategic bidding under uncertainty in short-term electricity markets and is extended in this paper to the problem of nding NE in these same markets. be a set of discrete quantity bids in Let . The variable can be represented the plausible range as the following sum of binary variables: (19) where ; ; and is a binary variable. Multiplying both sides of (19) by , and dening a new variable , results in (20)

(15) Problem (13)(15) is therefore an equilibrium problem with equilibrium constraints (EPEC) and is the main focus of this paper.

(21) by the Equation (20) allows us to replace the product linear expression on the RHS. In turn, the product of variables in (21) is transformed into the following relation: IF THEN IF THEN (22) The IF-THEN relation is now modeled as an MILP expression (23) (24) where is a scalar constant, large enough for (23) and (24) to be relaxed when and , respectively.1 D. Final MILP Formulation for the NE Conditions Applying the transformations (19)(24) to each net revenue function in the left-and right-hand sides of the NE conditions (16)(18)see Appendix A for detailswe arrive at the nal MILP formulation. E. MILP Problem Solution As mentioned, the NE is any feasible solution to the MILP constraint set (16)(18), which can be solved by commercially available optimization software. The way it can be done is by solving an optimization problem with an arbitrary objective function (for example, the objective function could be simply the equilibrium spot price) subject to the constraint set (16)(18). In this paper, we aim at maximizing the equilibrium spot price subject to the constraint set (16)(18). This was done so because, in the case of multiple Nash equilibria (see next section), the solution with the highest spot prices is generally the one
1For

III. PROPOSED SOLUTION APPROACH A. Overview As mentioned in the Introduction, the proposed solution technique comprises the following: 1) the proposed model looks for pure strategy equilibria in a discrete strategies space. This allows us to transform the optimization subproblems in the RHS of (13)(15) into a set of nonlinear constraints; 2) the application of a BE scheme to transform the nonlinear terms in the constraints into mixed integer linear constraints; and 3) the solution of the resulting integer linear system of constraints by commercial solvers. Each of these steps will be discussed next. B. Enumeration of Bids If the bids of each agent are a set of discrete values , the RHS maximization problems in (13)(15) can be solved by enumeration, as follows: (16) (17) (18) The enumeration model (16)(18) is computationally feasible because each RHS optimization problem is one-dimensional. In other words, although the number of possible bid combinations , the number of conof all agents is given by the product straints in (16)(18) is the sum .

example,

G could be max fc ; 1  j  Jg.

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of greatest interest for regulators (it is the worst case for consumers) and for bidders (who tend to move toward the highest spot price equilibrium) [17]. F. Multiple Nash Equilibria Multiple Nash equilibria were observed in [17][21]; more recently, some approaches were proposed by [22] and [23] to nd and enumerate those equilibria. It is worthy to note that our approach also allows the existence of multiple equilibria. This occurs when the set of constraints (16)(18) has more than one feasible point (note that every feasible point is an NE). Therefore, as explained in Section III-E, we use the maximization of the spot price as an objective function in order to obtain the solution with the highest spot price in the case the NE is not unique. In this paper, it is possible to identify multiple equilibria by using as an objective function the maximization of spot price and then successively solving new NE problems, incorporating bounds for the equilibrium spot prices according to the previously solved problems. Therefore, the solution of each NE problem will be a new equilibrium. For example, to nd the rst NE, we use the equilibrium spot price as the objective function is the equiand (16)(18) as the constraint set. Suppose that librium spot price associated to this problem. We can identify the existence of more equilibria by solving the same problem , where is the but with an additional constraint: equilibrium spot price in the new problem. This procedure can be repeated until the current NE problem becomes infeasible. However, it may be the case that multiple equilibria are associated with the same equilibrium spot price. In this case, we are not able to enumerate all of them. G. Nonexistence of Nash Equilibria A vector of strategies is an NE if and only if it satises (16)(18). Therefore, it is possible that (16)(18) has no feasible point, and hence, no NE exists for this problem. It is also worthy to note that the division (discretization) of the bidding space can affect the existence of NE (or articially eliminate potential NE), but a higher division still does not prevent the nonexistence of NE in pure strategies [2] and directly affects the computational effort. H. Computational Complexity Because all constraints are represented in an MILP environment, the BE scheme applied to the NE problem can take advantage of any improvements of MILP solution techniques. On the other hand, the model may eventually present the computational drawbacks that follow from limitations of the same integer programming algorithms in large-scale systems with multiple markets, and other short-term constraints the approach presented in this paper may have strong computational complexity. IV. MODEL EXTENSIONS In this section, we describe some possible extensions of the Nash-MILP solution approach to more complex models, including multi-plant operation costs/unit commitment, joint

price/quantity bidding models, transmission network, and coupling constraints. A. Multi-Plant Operation, Including Start-Up Costs In the previous sections, we modeled the operating cost of , where is the unit operating agent as a linear function cost. Moreover, each agent controls one generator.Appendix B shows how to extend the NE model when agent has multiple generators, with different operating cost functions, including unit commitment. B. Joint Price/Quantity Bids The NE model can be extended to represent joint price/quantity bids. In this case, the BE is applied to the price and quantity decision variables to alleviate the products of variables in the objective function (5) and in the primal-dual constraint (11). This extension is presented and discussed in greater detail in [24]. C. Transmission Network and Coupling Constraints As shown in [13], the BE scheme can incorporate transmission network constraints (zonal and dc power ow), meaning that they could also be included in the NE model presented in this paper. The implementation of transmission constraints in the NE model proposed in this paper will be the topic of future research. Coupling constraints (such as ramping, fuel, and emission constraints) could also be included in the NE model. However, the incorporation of transmission and coupling constraints directly affects the computational effort of the model. Their incorporation is beyond the scope of this paper. V. CASE STUDIES The BE solution to the NE will be illustrated with case studies derived from the Brazilian system. A. Brazilian System Overview The Brazilian generation system is composed of 150 plants, with a total installed capacity (2003) of 95 GW. Hydro generation accounts for 85% of the installed capacity, distributed in 110 hydro plants, arranged in complex topologies over 12 main river basins. The generation technologies for the remaining 28 plants include nuclear, natural gas, coal, and diesel (see [13] for more details). Because hydro plants use water, which is free, one could think that they have very small operating costs, mostly related to O&M. However, as discussed in [25], hydro plants have water values, which are the opportunity costs of storing the energy and selling it in the future. These water values, which are calculated by a stochastic hydrothermal scheduling model, have the same role as the thermal plants variable costs and are used in the case studies as hydros operating costs. B. Study Parameters There are eleven main generation utilities in the Brazilian system. We will represent three of the largest, Furnas (8200 MW), Cesp (6900 MW), and Duke Paranapanema (2200 MW), as price makers. The remaining utilities will be modeled as price takers, i.e., they will bid their variable operating costs and

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TABLE I FURNAS, CESP, AND DUKE GENERATORS

TABLE II LOWER AND UPPER BOUNDS FOR QUANTITY BIDS

TABLE III NE VERSUS COST-BASED BID LOAD level = 51 GWh

C. Bidding Model We implemented the complete NashCournot model described in Appendixes A and B, where Furnas, Cesp, and Duke bid quantities at a zero price, but Cesp has unit commitment decision on two of its plants. The remaining generators (price takers) will bid their available capacities and operating costs (water values, in the case of hydro plants). The stage is of one single hour. 1) Upper and Lower Bounds for Quantity Bids: The bidfor each price maker agent was established ding range as follows. For the upper bound , we used the fact that no agent would offer more energy than what would result from the least-cost dispatch, where all participants, including the price makers, use their variable operating costs. The reason is that, in a Cournot model, revenue is maximized by creating scarcity, i.e., decreasing the energy offered. To obtain a lower bound , we ran a revenue maximization modelsee [13]as if Furnas, Cesp, and Duke were acting in coalition. In this case, the net revenue for the plants is higherand the offered energy is smallerthan what can be obtained in the NE. Tables II and III show the resulting lower and upper bounds. In this base case, demand equals 51 GWh, which represents a usual peak load scenario for the Brazilian system. 2) Discretization of Quantity Bids: Each bidding range was divided into 32 values (31 intervals). This means that the NE model (11)(13) has binary variables in addition to the two binary variables that represent the Cesps unit commitment decisions for Jupia and I. Solteira, which makes a total of 17 binary variables. In addition to the binary variables, the equilibrium problem has 19 917 continuous variables and 14 281 constraints. D. Study Results 1) NE Results: The NE model was solved with the objective function of maximizing spot price. As discussed in Section III-E, this was done to nd the equilibrium associated with

Fig. 1. Dispatch cost functionFurnas, CESP, and Duke.

available capacities. Table I shows the capacity, plant type, and operating cost (water value, in the case of hydro) of the price maker agents. Fig. 1 shows the corresponding dispatch cost (in Brazilian Reais2 per MWh) as a function of each utilitys total generation. This was used to ensure the internal least-cost operation for the agents (see Appendix B for details) when determining its optimal bidding strategy. Our base case considers that Cesp makes unit commitment decisions (start-up costs as modeled in Appendix B) for two of its plants: Jupia and I. Solteira. For this reason, Cesps cost function has two discontinuities (which are indicated in Fig. 1). We consider that all other agents and plants do not consider any unit commitment decisions, i.e., they have no start-up costs.

2Exchange

rate: 1 US$=2,2 R$ (Brazilian Real), as of March 2006.

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the highest spot price in case there are multiple equilibria solutions. In our case study, multiple equilibria were observed, and therefore, one resulting in the highest equilibrium price was chosen. An Xpress MILP solver, which uses a branch-and-bound algorithm (see [26] for details), was used to nd the solution. Elapsed time was 10 min (Pentium IV-HT with a 2.8-GHz processor, 1 Mb of cache memory (Prescott) and 1 Gb of RAM memory). Table III compares the NE resultsspot price, total generation of Furnas, Cesp, and Duke, and their respective net revenueswith those of a cost-based solution, where all agents (including the price makers) offer their variable operating costs and available capacities. Since a natural question is whether the equilibrium would change in the absence of start-up costs, this table also presents the equilibrium in case Cesp makes no unit commitment decisions. We see that the NE solution (rst column of Table III) points toward a higher spot price than the cost-based one, showing that Furnas, Cesp, and Duke have (jointly) market power. This was achieved through the reduction of the energy offered by these companies. As expected, the decrease in energy production was compensated by the increase in spot price, resulting in higher net revenues for the price-maker agents. The NE with no unit-commitment decisions (third column of Table III) is very similar to the NE with unit-commitment decisions. Furnas, for example, adopts the same equilibrium strategy. However, there is an interesting opposite behavior relating Cesp and Duke. It is fairly intuitive that, in the equilibrium, Cesp would offer less quantity in the situation where it considers start-up costs than in the situation where it ignores it. This is the behavior detected by the model, but Duke increased its offered quantity by the same amount Cesp contracted it (in comparison to the no-start-up-costs situation), thus keeping the total amount offered by the price makers the same. Consequently, the spot price is the same in both cases. 2) Sensitivity to Load Level: Aiming at verifying the effect of possible greater competition at lower load levels, in this section, we also ran the NE model for a set of different demand scenarios. These scenarios were chosen to have values between a low demand scenario, in which the demand was set to 25 GWh, and an unusually high demand scenario, in which the demand was set to 55 GWh. The remaining simulation parameters were the same as before, i.e., Cesp considers start-up costs decisions. Likewise, a least-cost dispatch and a revenue maximization model (assuming a coalitional behavior) were run to determine bounds to the price makers bids. Table IV compares the NE and cost-based spot prices for the different values of load level and presents the computational effort in calculating the NE for each case. As expected, market power is reduced as load decreases, and the equilibrium solution converges to the cost-based one. Computational effort for these cases was fairly small, ranging from 210 min. Table V compares the energy production of the price maker agents in the NE and least-cost situations for two different situations: the base case, representing a peak load, and the low load case. As expected, the energy production in the base

TABLE IV SPOT PRICES (R$/MWh): NE VERSUS LEAST COST

TABLE V PRICE MAKERS GENERATION: NE VERSUS LEAST COST

TABLE VI PRICE MAKERS NET REVENUE: NE VERSUS LEAST COST

case is smaller in the NE solution, as a result of the withholding strategy for increasing spot prices. Finally, Table VI summarizes the net revenues of these companies for both NE and least-cost for each case simulated. Again, as expected, the NE net revenue in the base case increased in spite of the reduced energy production. VI. CONCLUDING REMARKS AND FUTURE WORK This paper introduced the framework of a BE solution approach to the EPEC problem of NE in strategic bidding in short-term electricity markets. The BE scheme is used to transform the nonlinear, nonconvex, NE problem into a mixed integer linear problem, which can be solved by commercially available computational systems. The BE scheme is applicable to Cournot, Bertrand, or joint price/quantity bidding models, including multi-plant operation costs, unit commitment, and

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the enumeration of multiple Nash equilibria. The approach was illustrated in case studies with congurations from the Brazilian system. Because all constraints of the proposed approach are represented in an MILP environment, the solution scheme can take advantage of recent improvements of MILP solution techniques. On the other hand, it may eventually present the computational drawbacks that follow from limitations of the same integer programming algorithms. Case studies presented in this paper had fairly small computational time but some important constraints, such as transmission network, coupling constraints, and bids in other markets, were neglected, and system size was small. These aspects can increase the computational effort of the MILP algorithms. The authors intend to incorporate these and other extensions of the NE model in future papers. In this sense, the authors intend to investigate alternative solution approaches to the NE model that would alleviate the computational effort in large case studies. For example, the fact that the number of continuous variables and constraints is large suggests the possibility of using relaxation strategies in the solution of the NE model (16)(18) and searching for the optimal NE solution through successive approximations of the relaxed optimization problems, which is already being investigated by the authors. Moreover, the obtainment of feasibility-cuts and the use of branch-and-cut strategies for the solution of the integer problems may be applied and should be evaluated as well. APPENDIX A BE TRANSFORMATION/NE A. Introduction and Objectives The objective of this Appendix is to present the nal NashMILP model after all BE transformations are applied. As seen in Section III, the NE is given by any feasible bidding strategy that meets simultaneously constraints (16)(18). However, the LHS and RHS of this constraint set depend on individual prot-maximization problems, which contain nonlinearities. Therefore, the solution approach comprises the following: 1) apply the BE scheme to transform the nonlinear terms into MILP constraints in the individual prot-maximization problem; 2) obtain the MILP model of the NE model by applying the BE scheme to both the LHS and RHS of (16)(18); and 3) the solution of the resulting MILP constraint set by commercial solvers. Each of these steps will be discussed next. B. BE of Individual Prot-Maximization Problems As mentioned in Section II, the agent s optimal bidding problem is the MPEC problem formed by the maximization of (5) subject to constraints (6)(11). The nonlinearities appear in the objective function (5) and in constraint (11). We now apply the transformations (19)(24) to the product of variables of (5) and (11) to arrive at the nal MILP formulation. The objective function (5) and constraint (6) are given by (A.1)

Equations (7)(11)ED complementary conditionscan be written as (A.3) (A.4) (A.5) (A.6)

(A.7) Note that the BE is only applied to (11), which is now rewritten as (A.7). Finally, we have the following MILP constraints: (A.8) (A.9) (A.10) Agent s bidding problem (5)(11) then becomes the maximization of (A.1), subject to constraints (A.2)(A.10) after the BE scheme is applied. C. BE Model of the NE As seen in Section III, the NE is given by the bidding strategy that meets simultaneously constraints (16)(18). The LHS and RHS of this constraint set depend on individual prot-maximization problems such as (5)(11), which contain nonlinearities. Therefore, we need to apply the BE scheme to each of them, which will be done next. 1) BE Model of the LHS Net Revenue: Applying the BE scheme to the LHS of the NE conditions (16)(18), we arrive at (A.11)

(A.12)

(A.13) As seen previously, we still have to add to (A.11)(A.13) a constraint set similar to (A.2)(A.10) (ED complementarity conditions) in order to dene , the resulting spot price when all agents bid at the equilibrium. This is presented in 3 (A.14)

(A.15) (A.2)
3All

variables with superscript e are results when all agents bid at the NE.

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(A.16) (A.17) (A.18) (A.31)

(A.19) (A.20) (A.21) (A.22) 2) BE Model of the RHS Net Revenue: We now model the RHS of (16)(18). Applying the previous procedure, results in (A.23) is the spot price from the ED where agent bids his where th option , and the remaining price maker agents stay with the equilibrium bids ; and is the generation of price taker agent , resulting from the ED resulting from these bids. Applying (A.23) to each RHS in (16)(18) results in (A.24) (A.25) (A.26) In contrast to the LHS model (A.11)(A.13), the BE scheme does not appear explicitly in the objective function of the RHS model (A.24)(A.26). The reason is that in the RHS, we enuare known merate the bidding options of each agent, that is, are linear expressions, values. Therefore, the products are decision variables (which makes the while in the LHS, products nonlinear). This does not mean that the BE scheme is not used in the RHS model; we also need to consider the ED complementarity conditions when agent bids his th option. This is shown in (A.27)(A.33). Moreover, because there is a separate ED in the , there are different primal-dual conRHS for each bid straint sets.4 For , (A.27) (A.28) (A.29) (A.30) subject to APPENDIX B GENERAL OPERATING COST FUNCTIONS A. Overview

(A.32) (A.33) is the th price taker generator constraint simplex Here, . multiplier, and and for Note that the equilibrium bid variables in each constraint (A.27)(A.33) are the same as in the LHS constraint set (A.14)(A.22). The nal BE formulation of each RHS of the NE conditions has (A.24)(A.26) and (A.27)(A.33) as constraint set. D. Final MILP Formulation The nal NE conditions are obtained by replacing (A.11)(A.13) and (A.24)(A.26) into the LHS and RHS of (16)(18), respectively, and adding the constraint sets (A.14)(A.22) and (A.27)(A.33). The resulting MILP model of the EPEC problem that calculates the NE can be solved by commercially available optimization packages.

In the previous sections, we represented the operating cost of , where is the unit variable agent as a linear function is the energy production allooperating cost ($/MWh), and cated to agent in the economic dispatch. In this Appendix, we discuss how to extend this model by assuming that agent controls a set of generators, with different operating costs (including unit commitment), which provide the physical support to its price/quantity bids. We show how to ensure the least-cost operation in the Cournot model, where generators bid quantities only. The general case is discussed in [24]. B. Ensuring Least-Cost Operation: Cournot Model Because the bid price of price maker agent in the Cournot is fully dispatched. Thus, for model is zero, the bid amount each energy allocation , agent must decide his least-cost production schedule that meets this target. In this case, the operating cost becomes a general function (B.1)

(B.2)
the LHS case, there is only one set of equilibrium bids fE g. Thus, there is only one ED and one set of constraints.
4In

(B.3) (B.4)

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where indexes the real generators underlying agent s bid is the variable operating ( is the number of generators);5 is the capacity cost of the th generator of agent ($/MWh); of the th generator of agent ; is the start-up cost of the th generator of agent ($); and is the binary variable that represents the start-up decision. Equation (B.2) makes total generation equal to the allocated energy. The constraints (B.3) and (B.4) represent, respectively, the capacity limits and start-up decisions. The net revenue expression, where all agents offer the equilibrium bid, is modied as follows: (B.5) The following operating constraints, similar to (B.2)(B.4), are added to the LHS set (A.11)(A.13): (B.6) (B.7) (B.8) is the energy produced by the th generator of agent where when all agents bid the equilibrium values (MWh), and is a binary variable that represents the start-up decision when all agents bid the equilibrium values. Because the set of possible RHS bids for each agent , is known beforehand, this also means that RHS operating cost for that agent can also be pre-calculated as (B.9) is the solution of (B.1)(B.4) for . where each Because the values are pre-calculated, optimality is automatically enforced. Replacing (B.9) into the RHS (A.24)(A.26), we arrive at the nal expression (B.10) The nal MILP can then be obtained replacing (B.5) and (B.10) into the LHS and RHS, respectively, of (16)(18) and adding (B.6)(B.8) to (A.14)(A.22). ACKNOWLEDGMENT The authors would like to thank R. Kelman from PSR for contributions on early versions of this paper. REFERENCES
[1] S. Hunt, Making Competition Work in Electricity. New York: Wiley, 2003. [2] D. Fudenberg and J. Tirole, Game Theory. Cambridge, MA: MIT Press, 1996.
5Note that these generators are not represented in the agents economic dispatch.

[3] A. K. David and W. Fushuan, Strategic bidding in competitive electricity markets: A literature survey, in Proc. IEEE Summer Meeting, Jul. 2000. [4] Game Theory Applications in Electric Power MarketsIEEE Tutorial 99TP-136-0, Proc. IEEE Winter Meeting, Jan. 1999. [5] I. Otero-Novas, C. Meseguer, C. Batlle, and J. J. Alba, A simulation model for a competitive generation market, IEEE Trans. Power Syst., vol. 15, no. 1, pp. 250256, Feb. 2000. [6] I. Otero-Novas, C. Meseguer, and J. J. Alba, An iterative procedure for modeling strategic behavior in competitive generation markets, in Proc. 13th Power Systems Conf., Trondheim, Norway, Jul. 1999. [7] B. F. Hobbs and U. Helman, Complementarity-based equilibrium modeling for electric power markets, in Modeling Prices in Competitive Electricity Markets, D. Bunn, Ed. New York: Wiley, 2004. [8] B. F. Hobbs, Linear complementarity models of Nash-Cournot competition in bilateral and POOLCO power markets, IEEE Trans. Power Syst., vol. 16, no. 2, pp. 194202, May 2001. [9] J. Bushnell, A mixed complementarity model of hydrothermal electricity competition in the western United States, Oper. Res., vol. 51, no. 1, pp. 8093, 2003. [10] A. Ramos, M. Ventosa, and M. Rivier, Modeling competition in electric energy markets by equilibrium constraints, Util. Pol., vol. 7, no. 4, pp. 233242, Apr. 1999. [11] J. Weber and T. Overbye, An individual welfare maximization algorithm for electricity markets, IEEE Trans. Power Syst., vol. 17, no. 3, pp. 590596, Aug. 2002. [12] W. Xian, Y. Li, and Z. Shaohua, Oligopolistic equilibrium analysis for electricity markets: A nonlinear complementarity approach, IEEE Trans. Power Syst., vol. 19, no. 3, pp. 13481355, Aug. 2004. [13] M. V. Pereira, S. Granville, M. Fampa, R. Dix, and L. A. Barroso, Strategic bidding under uncertainty: A binary expansion approach, IEEE Trans. Power Syst., vol. 20, no. 1, pp. 180188, Feb. 2005. [14] G. Gross and D. Finlay, Generation supply bidding in perfectly competitive electricity markets, Comput. Math. Organiz. Theory, vol. 6, pp. 8398, 2000. [15] S. de la Torre, J. M. Arroyo, A. J. Conejo, and J. Contreras, Price maker self-scheduling in a pool-based electricity market: A mixed-integer LP approach, IEEE Trans. Power Syst., vol. 17, no. 4, pp. 10371042, Nov. 2002. [16] B. F. Hobbs, C. B. Metzler, and J. Pang, Strategy gaming analysis for electric power systems: An MPEC approach, IEEE Trans. Power Syst., vol. 15, no. 2, pp. 638645, May 2000. [17] L. A. Barroso and W. W. Hogan, Discussion of Hydrothermal Market Simulator Using Game Theory: Assessment of Market Power, IEEE Trans. Power Syst., vol. 19, no. 1, p. 690, Feb. 2004. [18] S. Borenstein, J. Bushnell, and C. Knittel, Market Power in Electricity Markets: Beyond Concentration Measures, UCEI, PWP-059R, 1999. [19] R. Kelman, L. A. Barroso, and M. V. Pereira, Market power assessment and mitigation in hydrothermal systems, IEEE Trans. Power Syst., vol. 16, no. 3, pp. 354359, Aug. 2001. [20] C. A. Berry, B. F. Hobbs, W. A. Meroney, R. P. ONeill, and W. R. Stewart Jr., Analyzing strategic bidding behavior in transmission networks, Util. Pol., vol. 8, no. 3, pp. 139158, 1999. [21] B. F. Hobbs, C. Metzler, and J.-S. Pang, Calculating equilibria in imperfectly competitive power markets: An MPEC approach, IEEE Trans. Power Syst., vol. 15, no. 1, pp. 638645, Feb. 2000. [22] S. Torre, J. Contreras, and A. Conejo, Finding multi-period Nash equilibria in pool-based electricity markets, IEEE Trans. Power Syst., vol. 19, no. 1, pp. 643651, Feb. 2004. [23] P. F. Correia, T. J. Overbye, and I. Hiskens, Searching for noncooperative equilibria in centralized electricity markets, IEEE Trans. Power Syst., vol. 18, no. 4, pp. 14171424, Nov. 2003. [24] (2004) Nash Equilibrium in Strategic Bidding: A Mixed Integer Programming Approach. PSRI. [Online] Available: http://www.psrinc.com. [25] M. V. Pereira, N. Campodnico, and R. Kelman, Long-term hydro scheduling based on stochastic models, in Proc. EPSOM Conf., 1998. [26] X-Press MP. [Online] Available: http://www.dashoptimization.com/. Luiz Augusto Barroso (S00M06) received the B.Sc. degree in mathematics and the M.Sc. degree in optimization from Federal University of Rio de Janeiro (UFRJ), Rio de Janeiro, Brazil, and the Ph.D. degree in optimization from COPPE/UFRJ in 1998, 2000, and 2006, respectively. He joined PSR in 1999, where he has been working in project economics evaluation, system planning studies, and market power analysis in energy markets, focusing on hydro systems. He has been a speaker on power system planning and operations issues in Latin America, Europe, the U.S., and Canada.

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Rafael Dix Carneiro received the B.Sc. degree in electrical engineering from Ponticia Universidade Catolica do Rio de Janeiro and the M.Sc. degree in mathematics from Instituto de Matematica Pura e Aplicada (IMPA) in 2005. He is currently working toward the Ph.D. degree in economics at Princeton University, Princeton, NJ. He worked at PSR from 2003 to 2005 on strategic bidding in electric power markets.

Mario V. Pereira (M01) received the B.Sc. degree in electrical engineering from Ponticia Universidade Catolica do Rio de Janeiro, Rio de Janeiro, Brazil, and the Ph.D. degree in optimization from COPPE/Federal University of Rio de Janeiro in 1986. He is the President of PSR, and he is currently engaged in regulatory studies and the development of new methodologies and tools for risk management in competitive markets. Previously, he was a Project Manager at EPRIs PSPO program and Rsearch Cordinator at Cepel, where he developed methodologies and software for expansion planning, reliability evaluation,and hydrothermal scheduling. Dr. Pereira was one of the recipients of the Franz Edelman Award for Management Science Achievement, granted by ORSA/TIMS for his work on stochastic optimization applied to hydro scheduling.

Srgio Granville received the B.Sc. degree in mathematics from Ponticia Universidade Catolica do Rio de Janeiro, Rio de Janeiro,, Brazil, the M.Sc. degree in applied mathematics, and a Ph.D. degree in operations research from Stanford University, Stanford, CA, in 1978. He joined PSR, Rio de Janeiro, in 2000 and is currently engaged in risk management for energy markets and software development for power systems. Previously, he was a Visiting Scholar at Stanford University and a Researcher Coordinator at CEPEL, developing methodologies and software for system operation optimization and expansion planning.

Marcia H. C. Fampa received the Ph.D. degree in optimization from COPPE/Federal University of Rio de Janeiro, Rio de Janeiro, Brazil. She is a Professor with the Department of Computer Science, Institute of Mathematics, COPPE at the Federal University of Rio de Janeiro. She has also been an Invited Researcher at the Department of Management Sciences, University of Iowa, Ames. Her research interests include optimization and mathematical programming, with special interest in interior point methods and continuous relaxations for integer programming problems.