A game theory simulator for assessing the performances of competitive electricity markets

In the last years, electricity markets were created all over the world following different basis concepts. Market structure, market rules, demand levels, market concentration and energy sources to produce electricity have a strong influence on market performances. Modifications on these aspects may significantly affect market outcomes. Sensitivity analyses need proper simulation tools. In this paper a medium run electricity market simulator (MREMS) based on game theory is presented. This simulator incorporates two different games, one for the unit commitment of thermal units and one for strategic bidding and hourly market clearing. Either a Forchheimer (one leader) or Bertrand (all player are leaders) or even intermediate model with a whatever number of leaders can be selected, in dependence on the strategic behavior of the producers, allowing for the simulation of markets with different levels of concentration. The simulator was applied to analyse producers' behavior during the first operative year of the Italian power exchange. A comparison between simulation and true market results was carried out in order to test the simulator and validate its simplifying hypotheses. MREMS, yet capable to be used stand-alone, was conceived as the heart of a long-term market simulator (LREMS) allowing to simulate the long-run evolution of the generation park (investments in new plants, refurbishment and dismission of older ones). LREMS is a hierarchic simulator: a long-term "outer" game takes yearly investment decisions based on mid-term price projections provided by MREMS. Although this paper is mainly devoted to describe MREMS, one specific section will provide an overview of the "outer" game implemented by LREMS. (c) 2007 Elsevier B.V. All rights reserved.