Modeling price-based decisions in advanced electricity markets

In advanced electricity markets some bids and offers extend over a block of several consecutive time periods so that the block bid/offer has to be cleared entirely for all time periods comprising the block According to a typical market rule a block bid can be cleared only if its price is not lower than the average market price. Similarly, a block offer can be cleared only if its price is not higher than the average market price. The average market price is an arithmetic mean of the market prices over the block time periods (assuming identical time period lengths). The block bids/offers selection depends on the market prices which are part of the same optimization problem. The dilemma occurs: block bids/offers selection as a primal solution cannot be properly exercised without knowing the prices as a dual solution, and the prices depend on the selection decisions. We propose a model harmonizing such complex “primal-dual” market rules. The model ties together the primal and dual variables so that the “primal-dual” market rules become a part of the overall model. The model is a non-linear Mixed Integer Program (MIP). We have implemented an exact algorithm to solve this model. The computational results demonstrate the adequacy of the modeling and algorithmic approaches and their practical value for several European electricity markets.