A Two-Tier Matrix Game Approach for Obtaining Joint Bidding Strategies in FTR and Energy Markets

Transmission congestion results in revenue collected from the loads that often exceeds the payment made to the generators. The financial transmission right (FTR) is an instrument that allows the independent system operator (ISO) to redistribute the excess revenue (congestion charge) among the market participants. Generators and loads hold FTRs to hedge against congestion charges. Since the revenues from the FTR and energy markets are interdependent, each generator and load must have a joint bidding strategy for FTR and energy markets to maximize its total payoff. This paper presents a two-tier matrix game model that allows the generators and loads to obtain joint bidding strategies. The model also allows the ISOs and the market designers to assess the impact of various network configurations and rules on market performance (e. g., market power). The two-tier model considers multiple participants, multidimensional bid vectors, network contingencies, and varying demand. We conducted a numerical validation of our model by analyzing the three-node network studied by Joskow and Tirole (2000). Additional numerical studies were conducted on a five-node network to examine the impact of holding FTRs on the bidding strategies in the energy market and joint payoffs of the participants.