Competition and Optimization in Electricity Systems

Abstract

Electricity prices are characterized by high volatility and severe price spikes. At the root of these phenomena is the strategic behavior of market participants. A good understanding of the market competition is key to making better regulation, contract, and investment decisions. The goal of this thesis is to study the following market competition problems: (1) the competition between flexible generators with fast ramping rates and inflexible generators with constant production rates, (2) the effect of the renewable generation penetration and production based subsidies on the competition and operating efficiency, (3) generation competition in transmission constrained networks, and (4) competition in the capacity expansion of electricity networks.

We first consider a centralized electricity model and find that reducing the production based subsidies to renewable plants dampens their intermittency effect through controlled curtailment, cuts operational cost, and improves the system's balance. We then consider an oligopoly in which generators submit supply function bids and analyze a supply function equilibrium (SFE) model with generators that have different ramping rates. We find that the controlled curtailment of renewables has an additional benefit in oligopolistic markets as it can reduce generator market power, which has favorable operational efficiency and electricity price ramifications. We also find that the classical SFE model is inadequate for modeling renewables and inflexible generators, and can grossly overestimate the competition intensity. We modify the SFE model to account for these issues. Afterwards, a Bertrand model is used to study the duopoly competition in a transmission constrained network. We find that adding transmission constraints in this model does not change the bidding policy, instead it changes the critical demand levels at which firms revise their position from competitive to aggressive bidding. We also solve the symmetric mixed strategy Nash equilibrium problem for multiple generators in a Bertrand electricity auction. Finally, we study several transmission expansion schemes and devise two investment mechanisms that achieve near social optimality.