Strategic bidding of Gencos under two pricing mechanisms: Pay-as-bid and uniform pricing

Abstract

This paper compares the behavior of Generating Companies (Gencos) in the two competing pricing mechanisms of uniform and pay-as-bid pricing in an electricity market. Game Theory is used to simulate bidding behavior of Gencos and develop Nash equilibrium bidding strategies for Gencos in electricity markets. In the proposed methodology, competition is modeled as a bi-level problem with the upper level subproblem representing individual Gencos for maximizing their profits, and the lower level sub-problem representing the Independent System Operator (ISO), which minimizes consumer's payments. The simulation results show that Gencos yield less total revenue in expectation under pay-as-bid pricing than under uniform pricing.