Generation side strategy and user side cost based on equilibrium analysis of the power market under the reliability option

The reliability option (RO) ensures generation capacity adequacy, drawing inspiration from financial product options. However, most recent RO studies overlook the gaming strategies employed by power producers. This paper proposes a bi-level model based on an equilibrium analysis of the power market under RO. The upper-level model aims to maximize the power producers’ profit, whereas the lower-level model focuses on market clearing. Profit calculation considers factors like electricity sales income, option fees income, fuel cost, expansion investment cost, refund cost, and penalties. The bi-level model is reformulated into a mathematical problem with equilibrium constraints (MPEC) for each producer using Karush–Kuhn–Tucker conditions of the lower-level model. We then apply a series of linearization methods. The market equilibrium is obtained through the dynamic game framework for all MPECs. We also provide a comprehensive purchase cost calculation and demonstrate its equivalence to user side surplus. We examine cases from various spot market construction maturities in a provincial area of China. Our results indicate that implementing the RO mechanism and aligning parameters with the proposed optimal RO parameter curve, one can reduce the comprehensive purchase cost.