Behavioural simulations in spot electricity markets

Behavioural simulations in spot electricity markets

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Article ID: iaor20116354
Volume: 214
Issue: 1
Start Page Number: 147
End Page Number: 159
Publication Date: Oct 2011
Journal: European Journal of Operational Research
Authors: ,
Keywords: simulation
Abstract:

We study the consistency of behavioural simulation methods used to model the operations of wholesale electricity markets. We include different supply and demand representations and propose the Experience‐Weighted Attractions method (Camerer and Ho, 1999) to encompass several behavioural paradigms. We compare the results across assumptions and to standard economic theory predictions. The match is good under flat and upward‐slopping supply bidding, and also for plausible demand elasticity assumptions. Learning is influenced by the number of bids per plant and the initial conditions. The simulations perform best under reinforcement learning, less well under best‐response and especially poorly under fictitious play. The overall conclusion is that simulation assumptions are far from innocuous. We link their performance to underlying features, and identify those that are better suited to model liberalised electricity markets.

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