Strategic plays in electricity markets: exploring gaming opportunities for demand under different settlement rules

Abstract

Even when a market is cleared using optimal power flow calculations, ensuring dispatch feasibility, the settlement can be performed in different ways. In this paper, we consider three different types of settlement mechanisms for an optimal dispatch, 1) nodal pricing for both generation and demand, 2) nodal price for generation and weighted average nodal price for demand, and 3) settlement of both generation and demand at the bid price of the most expensive cleared generator. The settlement rules affect the distribution of revenues and costs among agents as well as the scheduling of price-based or implicit demand responses. We analyze these effects under competitive conditions and in the presence of a strategic agent representing either a demand alone or a demand in conjunction with a generator. Our findings highlight nodal pricing as the most efficient approach for demand response scheduling in competitive marts, whereas average and marginal pricing can lead to suboptimal outcomes, especially with strategic agents.