Impact Analysis of Price Cap on Bidding Strategies of VPP Considering Imbalance Penalty Structures

Youngkook Song, Yongtae Yoon and Younggyu Jin ()
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Youngkook Song: Department of Electrical and Computer Engineering, Seoul National University, Seoul 08826, Republic of Korea
Yongtae Yoon: Department of Electrical and Computer Engineering, Seoul National University, Seoul 08826, Republic of Korea
Younggyu Jin: Power System Economics Laboratory, Department of Electrical Engineering, Jeju National University, 102 Jejudaehak-ro, Jeju 62343, Republic of Korea

Energies, 2025, vol. 18, issue 15, 1-17

Abstract: Virtual power plants (VPPs) enable the efficient participation of distributed renewable energy resources in electricity markets by aggregating them. However, the profitability of VPPs is challenged by market volatility and regulatory constraints, such as price caps and imbalance penalties. This study examines the joint impact of varying price cap levels and imbalance penalty structures on the bidding strategies and revenues of VPPs. A stochastic optimization model was developed, where a three-stage scenario tree was utilized to capture the uncertainty in electricity prices and renewable generation output. Simulations were performed under various market conditions using real-world price and generation data from the Korean electricity market. The analysis reveals that higher price cap coefficients lead to greater revenue and more segmented bidding strategies, especially under asymmetric penalty structures. Segment-wise analysis of bid price–quantity pairs shows that over-bidding is preferred under upward-only penalty schemes, while under-bidding is preferred under downward-only ones. Notably, revenue improvement tapers off beyond a price cap coefficient of 0.8, which indicates that there exists an optimal threshold for regulatory design. The findings of this study suggest the need for coordination between price caps and imbalance penalties to maintain market efficiency while supporting renewable energy integration. The proposed framework also offers practical insights for market operators and policymakers seeking to balance profitability, adaptability, and stability in VPP-integrated electricity markets.

Keywords: electricity market; virtual power plant; bidding strategy; price cap; imbalance penalty (search for similar items in EconPapers)
JEL-codes: Q Q0 Q4 Q40 Q41 Q42 Q43 Q47 Q48 Q49 (search for similar items in EconPapers)
Date: 2025
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