Surreal illustration of interconnected power grids and auction hammers symbolizing fair and efficient electricity markets.

Decoding Electricity Markets: Can We Prevent Strategic Bidding?

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Theo Raines in Business & Economy December 2025 • 4 min read.

"Explore how auction designs and pricing models can reduce self-scheduling and increase incentive compatibility in electricity markets, ensuring fair and efficient energy distribution."


Electricity markets, essential for scheduling energy production, face complex challenges due to their non-convex nature, where traditional pricing models fail to ensure fair market operations. This complexity arises from the unit commitment problem, a mixed-integer program that system operators use. The optimal value function's non-convexity hinders the application of standard marginal pricing, making it difficult to set prices that accurately reflect market conditions and motivate participants to adhere to dispatch schedules.

When market participants spot opportunities for profit, they may resort to self-committing, offering energy at zero fixed operating costs, or self-scheduling, providing energy at zero total cost. These strategies, while potentially lucrative for individual players, can distort the market and undermine the central dispatch system. The question arises: How can market designs be improved to reduce these incentives for strategic behavior and ensure a more efficient and equitable energy market?

Recent research has explored various non-convex pricing models to address these challenges. This article delves into these innovative approaches, examining how they can reduce the incentive for producers to deviate from central dispatch decisions. By simulating bidder behavior and employing reinforcement learning algorithms, we aim to uncover methods that promote incentive compatibility and reduce self-scheduling in electricity markets.

The Problem with Current Electricity Market Designs: Strategic Bidding

Surreal illustration of interconnected power grids and auction hammers symbolizing fair and efficient electricity markets.

Traditional electricity markets operate under the assumption that all participants act as price takers, with offers reflecting the actual marginal cost of resources. However, this assumption often breaks down in practice. Units that identify a chance to increase profits may engage in strategic bidding, self-committing, or self-scheduling to exploit market inefficiencies.

This behavior can have significant consequences. For example, it can affect long-term investment decisions, as these are often based on the expected behavior of the spot market. Critically assessing whether current wholesale electricity price formation policies truly support competitive behavior is essential.

  • Self-Commitment: Units offer energy at zero fixed operating costs, aiming to be dispatched regardless of the market price.
  • Self-Scheduling: Units submit offers at zero total cost, seeking to control their production levels independently of the central dispatch.
These strategies allow participants to exercise market power, potentially leading to suboptimal dispatch decisions and reduced overall market efficiency. Addressing this issue requires innovative pricing mechanisms that align individual incentives with the broader goals of market efficiency and social welfare.

The Future of Electricity Markets: Promoting Efficiency and Fairness

Addressing strategic bidding in electricity markets requires a multifaceted approach that combines innovative pricing mechanisms, robust monitoring, and effective mitigation strategies. By fostering greater incentive compatibility and reducing the opportunities for self-scheduling, we can create a more efficient, equitable, and reliable energy system that benefits both producers and consumers. Further research and development in this area are essential to navigate the evolving challenges of modern electricity markets and ensure a sustainable energy future.

About this Article -

This article was crafted using a human-AI hybrid and collaborative approach. AI assisted our team with initial drafting, research insights, identifying key questions, and image generation. Our human editors guided topic selection, defined the angle, structured the content, ensured factual accuracy and relevance, refined the tone, and conducted thorough editing to deliver helpful, high-quality information.See our About page for more information.

Everything You Need To Know

1

What are the primary issues affecting the efficient operation of electricity markets today?

Electricity markets face challenges due to their non-convex nature, stemming from the unit commitment problem and the resulting difficulties in applying standard marginal pricing. This complexity creates opportunities for strategic bidding, where participants may resort to self-committing or self-scheduling to maximize profits, distorting the market and undermining the central dispatch system. Overcoming these requires market designs which diminish the incentives for this type of strategic behavior.

2

How do "self-commitment" and "self-scheduling" strategies impact the stability and fairness of electricity markets?

Self-commitment involves units offering energy at zero fixed operating costs to ensure dispatch regardless of market price, while self-scheduling includes units submitting offers at zero total cost to control their production independently of central dispatch. These strategies allow participants to exercise market power, potentially leading to suboptimal dispatch decisions, reduced overall market efficiency, and skewed long-term investment decisions. The market's assumption of price-taking participants is violated when these actions are taken.

3

What solutions are being explored to address strategic bidding and promote incentive compatibility in electricity markets?

To address strategic bidding, research is focusing on non-convex pricing models. By simulating bidder behavior and employing reinforcement learning algorithms, the goal is to uncover methods that promote incentive compatibility and reduce self-scheduling. These approaches aim to align individual incentives with the broader goals of market efficiency and social welfare, creating a more equitable and reliable energy system.

4

Why does the non-convex nature of the unit commitment problem complicate electricity market operations, and what pricing challenges does it present?

The non-convex nature of the unit commitment problem makes it difficult to apply standard marginal pricing effectively, because the optimal value function is non-convex. This difficulty hinders the ability to set prices that accurately reflect market conditions and incentivize participants to adhere to dispatch schedules. Consequently, market participants may exploit pricing discrepancies through self-committing or self-scheduling, further distorting the market.

5

In what ways can innovative auction designs and pricing models improve the long-term health and competitiveness of electricity markets?

Innovative auction designs and pricing models can foster greater incentive compatibility and reduce opportunities for self-scheduling. By addressing strategic bidding through multifaceted approaches that combine these mechanisms with robust monitoring and effective mitigation strategies, we can create a more efficient, equitable, and reliable energy system. The goal is to ensure that current wholesale electricity price formation policies truly support competitive behavior and long-term investment decisions.

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