Analyzing the Impact of Strategic Bidding on the Reserve Capacity via a Bi-Level Model

2025-06-25

AI Summary

Under high renewable energy penetration, strategic bidding by flexible resource generators may undermine reserve adequacy, exacerbating the trade-off between system security and economic efficiency. Method: This paper formulates a bilevel optimization model to capture the Stackelberg game between generator strategic bidding and system operator dispatch decisions, and proposes a novel dual-theory-based continuous unit commitment approximation to enable large-scale reserve modeling and computationally efficient solution. Contribution/Results: The analysis reveals that while strategic bidding incentivizes additional unit commitment and improves reserve margins, it simultaneously elevates wholesale prices and increases market concentration. These findings underscore the critical role of market mechanism design—in particular, rules governing reserve procurement and market power mitigation—in jointly ensuring reserve adequacy and preserving competitive market outcomes under imperfect competition.

Technology Category

• Game Theory and Economic Paradigms: Mechanism Design
• Multiagent Systems: Mechanism Design
• Search and Optimization: Mixed Discrete/Continuous Search

Application Category

• Economics, Online Markets and Human Computation: Uses of LLMs and GenAI for marketplace design, bidding, and strategic interactions
• Security and Privacy: Large-scale security measurements
• User Modeling, Personalization and Recommendation: Attacks and countermeasures in recommendation systems

Abstract

The growing integration of renewable energy sources necessitates adequate reserve capacity to maintain power balance. However, in market clearing, power companies with flexible resources may submit strategic bids to maximize profits, potentially compromising system reserves. This paper examines the effects of such strategic behavior by modeling the market as a bi-level problem. The upper level represents a strategic company aiming to maximize profit, while the lower level simulates the system operator clearing the market based on submitted offers. To enable duality-based solution methods, we approximate unit commitments with a continuous reserve capacity calculation. Case studies indicate that, in an imperfectly competitive market, more units are incentivized to operate,enhancing system reserves. However, some units go online mainly for profit, ultimately raising electricity costs for consumers. These findings highlight the importance of market design in managing the trade-off between reserve adequacy and economic efficiency in the presence of strategic bidding behavior.

Problem

• Analyzing strategic bidding impact on reserve capacity
• Modeling market as bi-level problem for profit maximization
• Balancing reserve adequacy and economic efficiency in markets

Innovation

• Bi-level model for strategic bidding analysis
• Continuous reserve capacity approximation method
• Market design for reserve adequacy trade-off