Strategic bidding for a price-maker hydroelectric producer: Stochastic dual dynamic programming and Lagrangian relaxation

Gregory Steeger, Timo Lohmann and Steffen Rebennack

IISE Transactions, 2018, vol. 50, issue 11, 929-942

Abstract: In bid-based markets, energy producers seek bidding strategies that maximize their revenue. In this article, we seek the maximum-revenue bidding schedule for a single price-maker hydroelectric producer. We assume the producer sells energy in the day-ahead electricity market and has the ability to impact the market-clearing price with its bids. To obtain the price-maker hydroelectric producer’s bidding schedule, we use a combination of Stochastic Dual Dynamic Programming and Lagrangian relaxation. In this framework, we dualize the water balance equations, allowing an exact representation of the non-concave immediate revenue function, while preserving the concave shape of the future revenue function. We model inflow uncertainty and its stagewise dependence by a periodic autoregressive model. To demonstrate our approaches’ utility, we model Honduras’ electricity market assuming that the thermal producers act as price-takers and that one price-maker hydro producer operates all of the hydroelectric plants.

Date: 2018
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DOI: 10.1080/24725854.2018.1461963

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