Optimizing demand-side bids in day-ahead electricity markets

We present a model of a purchaser of electricity in Norway, bidding into a wholesale electricity pool market that operates a day ahead of dispatch. The purchaser must arrange purchase for an uncertain demand that occurs the following day. Deviations from the day-ahead purchase are bought in a secondary market at a price that differs from the day-ahead price by virtue of regulating offers submitted by generators. Under an assumption that arbitrageurs are absent in these markets, we study conditions under which the purchaser should bid their expected demand and examine the two-period game played between a single generator and purchaser in the presence of a competitive fringe. In all our models, it is found that purchasers have an incentive to underbid their expected demand, and so the day-ahead prices will be below expected real-time prices. We also derive conditions on the optimal demand curve that purchasers should bid if the behavior of the other participants is unknown but can be modeled by a market distribution function.