(published PESGM09)Risk Analysis of Volume Cheat Strategy in a.pdf

1 Abstract : Capacity market provides additional revenue stream for the power suppliers. In a capacity-energy combined market environment, suppliers have incentives to deliberately over-offer their capacities in the capacity market while bid very high price in the energy and ancillary markets to avoid operation. This paper analyzes the risks and profits of this capacity-over- offer behavior, and develops a method for computing non- operable penalty level which can prevent the capacity-over-offer behavior. It is found that the effective penalty level is highly correlated with the stochastic characteristics of the supplier’s profit streams and attitudes towards risk. Two types of suppliers are identified with high potential of capacity cheating behavior in the analysis. The methodology and the results are potentially useful for regulating participants’ misbehaviors and enhancing the operation security in a capacity-energy market environment. Index Terms: capacity market; volume cheat; risk management; Prospect Theory; Monte-Carlo simulation. I. INTRODUCTION Capacity market is one approach to address the long-term generation resource adequacy problem. In northeast US, capacity markets have been in operation for almost ten years. Capacity market is an explicit mechanism for pricing resource reliability, which yields an explicit/separate price signal for generation investment. A capacity market also provides generators with additional revenue stream besides energy/ancillary markets. These revenues are important for peaking generators which have “missing money” problem [1][2][3]. The disadvantage of capacity market approach is its administrative essence. Some argue that creating capacity markets will delay the development of a sufficient demand response, which is the right way to ultimately address resource adequacy problem. They believe in other approaches, such as forward contracts and call options to ensure generation investment [4][5][