Research On Nash Equilibrium And Generators' Bidding Strategies In Electricity Markets With Option Contracts

The worldwide restructuring and deregulation of electric power industry have significantly changed the operation mode of power systems. The objective is to introduce fair competition mechanism into electric power industry, improve the economic efficiency of electric power operation, realize the rational redistribution of power resources, and maximize the whole social welfare. However, the special attributes of electric power industry, such as entry deterrence, small demand elasticity, transmission constraints, transmission losses and no largely effective storage, make only a few suppliers be able to provide power services in some geographic regions. Consequently, the practical electricity market is more akin to be an oligopolistic market than a perfect competition market. In the oligopolistic electricity market environment, participants are supposed to pay much attention to the consequences of their own decisions while market regulators need to figure out the corresponding market features and efficiency of different modes of wholesale markets. Therefore the development of reasonable decision-making models and methods has significant implications in both theoretic and practical respects. In diversified research methods, a variety of oligopolistic equilibrium models based on game theory are the important instruments to quantitatively examine the strategic behaviors of market participants and their impacts on the whole market. Incorporating financial engineering theory and non-cooperative game theory, this dissertation addresses the impacts of electricity option contracts on the efficiency of electricity markets and generators' bidding strategies taking the special characteristics of electric power industry into account. Detailed contributions of this dissertation are listed as follows:Firstly, the application of financial engineering theory in electricity markets is introduced, and the categories of risks in electricity markets are addressed. The framework of electricity financial derivatives markets is constructed and the basic procedure of risk management in electricity markets is proposed. The relative theory of financial engineering is applied to study the characteristics, application and pricing of electricity forward contracts, electricity futures contracts and electricity option contracts. The Chinese electricity capital market and financial derivatives markets are discussed, and the suggestion is introduced for the construction of Chinese electricity financial markets. Secondly, the underlying asset of financial electricity option contract is electric power energy and it is settled by cash payment. The Cournot conjectures are used to model the generators' competitions in spot and financial call option markets, and a two-stage equilibrium model for spot and financial call option markets is established taking load fluctuations into account, where the objective function is continuous and differentiable. This model can be solved by backward induction method. The incentives for generators to commit financial call option contracts and the impacts of strategic financial call options contracting on generators' competitive behaviors are analyzed. It is shown that strategic financial call options contracting can effectively mitigate the abuse of market power of generators, lower the spot prices, and financial call option contract makes electricity markets more competitive than forward contract.Thirdly, the physical electricity option contract is associated with actual delivery of power energy and the holder of a physical electricity option contract is equivalent to hold a virtual power plant. Based on the special characteristics of physical call option contract, a two-stage Cournot equilibrium model is established taking generators' strategic physical call options contracting into account. The impacts of generators' strategic physical call options contracting on generators' bidding strategies in spot market are addressed. A numerical example for two oligopolists is given to show the rationality and effectiveness of the proposed model and solution method. The impacts of the strike price of physical call options, the volatility of load, and the production cost on generators' strategic physical call options contracting are analyzed. The results show that the high volatility of spot prices weakens the enthusiasm of generators to trade physical call options, and physical call option contract has a lesser impact on electricity market than forward contract.Fourthly, a two-period Cournot equilibrium model is established in financial call option and spot markets, where the option market is organized by bilateral or multilateral modes and the spot market is organized by bid-based pool, taking the strategic behaviors of risk averse purchasers in options contracting into account. The impacts of the strategic behaviors and risk evaded mentalities of purchasers on the equilibrium of electricity markets and the bidding behaviors of generators are analyzed. It is shown that in order to benefit from financial call options contracting, generators can exercise market power to drive up premium by utilizing the risk evaded mentalities of purchasers. The high volatility of spot price further strengthens the market power abuse of generators. Fifthly, the most important difference between electricity markets and other commodity markets is that transactions of electric power energy can be fulfilled by utilizing a network in which the flow of energy obeys Kirchhoff's current law and Kirchhoff's voltage law and is limited by the thermal capacity of the links. Therefore, in order to more fully reflect the actual situation of the electricity markets, transmission constraints must be considered in equilibrium model. A joint Cournot equilibrium model in financial call option and spot markets is established taking transmission constraints into account. This model can be solved by a nonlinear complementarity method and an advanced Levenberg-Marquardt algorithm. The impacts of transmission constraints and loop flow on generators' strategic financial call options contracting are analyzed. The behavior patterns of generators exercising market power are inspected when the transmission network is congested. It is realistic significance for regulators to formulate effective market rules and independent system operator (ISO) to abatement transmission congestion by rationally scheduling electric power.Finally, participants of electricity markets are not hold complete information, and this brings more difficulties for participants to develop reasonable bidding strategies and is also the difficulties to research the bidding problem in electricity markets. Considering that electricity markets around the world have been in operation for many years and a certain amount of historical data has been accumulated, so the probability distribution of market states can be obtained by utilizing various forecasting methods. With the assumption that probability density function of the bidding strategies of the equivalent competitors is able to be formulated by making use of the public information in electricity markets, a two-stage Cournot model in financial call option and spot markets with incomplete information is developed based on expected profit maximization. The impacts of incomplete information on generators' bidding strategies are analyzed, and the proposed method in this paper is helpful for generators to develop reasonable bidding strategies.