Testing optimality of firms' actual bid in Iran wholesale electricity market

Abstract

Summary In a restructured wholesale electricity market, finding an optimal bidding strategy is important from 3 perspectives: maximizing firms' expected profit; identifying their exercised market power by the firms, from a regulatory point of view; and analyzing the effect of the auction format on firms' bidding strategies. While studying the optimal bidding strategy in the uniform‐price electricity auctions is common, little attention has been paid to pay‐as‐bid (discriminative) auctions. This paper tests ex‐post optimality of a firm's actual bid in the Iran wholesale electricity market with a pay‐as‐bid auction using 2 methods: The first one considers the submission of a “single‐step bid” in the intersection point of “a firm's actual bid” and “realized residual demand” curves, and the second one is to submit “single‐step bid” in the intersection point of “best response” to “realized residual demand.” Results show that firms' bidding behaviors in the Iran wholesale electricity market are not ex‐post optimal. In this regard, medium‐size firms display better performance than their larger counterparts, and large firms perform better than small ones. Also, firms under different ownership and technology bid suboptimally with significant differences. Furthermore, firms' performances were best in peak hours and got progressively worse during shoulder and off‐peak hours. These results strongly conform with panel regression models.