Modeling strategic forward contracting in transmission constrained power markets

Taking the effects of transmission network into account, strategic forward contracting induced by the interaction of generation firms´ strategies in the spot and forward markets is investigated. A two-stage game model is proposed to describe generation firms´ strategic forward contracting and spot market competition. This two-stage model is formulated as an equilibrium problem with equilibrium constraints (EPEC), in which each firm´s optimization problem in the forward market is a mathematical program with equilibrium constraints (MPEC) with a parameter-dependent spot market equilibrium as the inner problem. A nonlinear complementarity method is employed to solve this EPEC model. A numerical example is used to verify the effectiveness of the proposed modeling and solution method.