Risk analysis of volume cheat strategy in a competitive capacity market

Capacity market provides additional revenue stream for the power suppliers. In a capacity-energy combined market environment, suppliers have incentives to deliberately over-offer their capacities in the capacity market while bid very high price in the energy and ancillary markets to avoid operation. This paper analyzes the risks and profits of this capacity-over-offer behavior, and develops a method for computing non-operable penalty level which can prevent the capacity-over-offer behavior. It is found that the effective penalty level is highly correlated with the stochastic characteristics of the supplier´s profit streams and attitudes towards risk. Two types of suppliers are identified with high potential of capacity cheating behavior in the analysis. The methodology and the results are potentially useful for regulating participants´ misbehaviors and enhancing the operation security in a capacity-energy market environment.