Competition, Risk and Learning in Electricity Markets

Murat Kaya, Industrial Engineering, Sabancı University

Abstract

Electricity markets often operate as oligopolies, rather than a perfectly competitive market, due to the physical transmission constraints in the power grid and the existence of a limited number of participants. The frequent bidding nature of the market provides its participants with learning opportunities. In this work, we study the effects of learning and risk aversion on generation company (GenCo) bidding behavior in an oligopolistic electricity market. To this end, we develop a flexible agent-based simulation model in which GenCo agents bid prices in each period. Taking transmission grid constraints into account, the Independent System Operator (ISO) solves a DC-OPF problem to determine locational prices and dispatch quantities. Our simulations show how, due to competition and learning, the change in the risk aversion level of even one GenCo can have a significant impact on all GenCos’ bids and profits. In particular, some level of risk aversion can be beneficial to all GenCos, whereas excessive risk aversion degrades profits by causing intense price competition. Our comprehensive study on the effects of Q-learning parameters finds the level of exploration to have a large impact on the outcome. The results of this work can help GenCos develop bidding strategies that consider their rivals’ as well as their own learning behavior and risk aversion levels. Likewise, the results can help regulators in designing market rules that take realistic GenCo behavior into account. This is joint work with Dr. Danial Esmaeili Aliabadi and Prof. Güvenç Şahin of Sabancı University.

Short Bio

Murat Kaya is a faculty member at Sabancı University Industrial Engineering Program. He holds M.S. and Ph.D. degrees from Stanford University, Management Science and Engineering (MS&E) Department, and a B.S. degree from METU Industrial Engineering Department. During his Ph.D. study, Dr. Kaya worked for several projects at Hewlett Packard Research Laboratories in Palo Alto, USA. Dr. Kaya's research is concerned with strategic decision analysis in supply chains. In addition to building analytical models of decision making, he also studies the related behavioral issues through experiments with human decision makers. Dr. Kaya’s recent interest is directed towards decision problems in electricity/energy supply chains. He is also involved in integrated energy systems modeling. Dr. Kaya is affiliated with Sabancı University Istanbul International Center for Energy and Climate (IICEC).

Venue

Friday, December 18, 2020, 4.00 pm - Zoom Meeting