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Market Power under Auction-Based Energy Pricing

Research Abstract

Auctions serve as a primary pricing mechanism in various market segments of a deregulated power industry. In day-ahead (DA) energy markets, strategies such as uniform price, discriminatory, and second-price uniform auctions result in different price settlements and thus offer different levels of market power. In this research, we consider a nonzero sum stochastic game theoretic model and a reinforcement learning (RL)-based solution framework that allow assessment of market power in DA markets. Since there are no available methods to obtain exact analytical solutions of stochastic games, an RL-based approach is utilized, which offers a computationally viable tool to obtain approximate solutions. These solutions provide effective bidding strategies for the DA market participants. The market powers associated with the bidding strategies are calculated using well-known indices like Herfindahl–Hirschmann index and Lerner index and two new indices, quantity modulated price index (QMPI) and revenue-based market power index (RMPI), which are developed in this research. The proposed RL-based methodology is tested on a sample network.

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