Game theory application to pricing structure of market-based power system

Electricity markets are experiencing widespread changes that are significantly altering the Industry. In this paper we consider economic load dispatching rules in power systems under competitive environment when independent power producers (IPPs) are introduced and analyze their economic consequences by using game theory. An electric utility and IPP are included in the model as players of the game. We consider an extensive game model of electricity market where IPP enter into the game, firstly as a group and secondly when each IPPs enters into the game individually. Utility and IPPs intend to maximize their own profit. The prices between the electric utility and IPP are determined such that they are Nash equilibrium points. In this paper, we employ the Nash equilibrium solution method to analyze negotiation processes between utility and IPPs since it is widely recognized as a rational decision for competitive markets in terms of axiom. It is shown in this paper, that all obtained simulation results can be viewed as an extension of the equalizing incremental cost from regulated power systems to competitive power markets.