Hydrothermal Market Simulator Using Game Theory: Assessment of Market Power Jorge Villar and Hugh Rudnick Criticism had arisen on the centralized poolcos, formulating the need for a second stage of reform, establishing highly flexible mechanisms of decentralized exchanges, and achieving real market mechanisms, with wholesale and retail competition. While the second-generation concepts are not unique to California, countries such as Norway, the UK and Spain have made similar reforms, the California model arose as the paradigm in the region. The defined objective was, within the California paradigm, to replace the centralized pools and to force “perfect” competition with the laissez faire model of the Power Exchange, coupled to an Independent System Operator that dispatches essentially based on long-term physical bilateral contracts plus short term unrestricted bids. Abstract-- The aim of this work is to build a model able to simulate a hydrothermal electric power market based on simple bids to a Power Exchange. The model studies the behavior of different market agents in a short-term horizon and delivers information about spot prices, use of water and other relevant variables. Initially, a thermoelectric market is simulated through a static model based on Cournot concepts. The addition of hydroelectric power stations and time dependencies is made later, using a dynamic programming algorithm to build a dynamic model. In each stage and state of the dynamic programming, a Nash-Cournot equilibrium is determined to assess the behavior of the thermoelectric power stations (static model). Different strategies that firms can follow and the consequences of each one of them are analyzed. Market power mitigation effects of physical and financial bilateral contracts are also investigated. A case study with data on the Chilean power system is presented and analyzed. Under this context, it is interesting to analyze an operating scheme similar to the one formulated in California, based on physical bilateral contracts where surpluses are traded in a power exchange with free price bids. There are many questions and challenges this change could bring to the Latin American generation markets, so it becomes of utmost importance to predict its behavior. This is more a challenge given the important hydrological contribution in these markets, unlike the markets in North America and Europe. This is precisely the fundamental aim of this work. To try to predict the consequences of the implementation of this new market scheme in a hydrothermal market, the possible strategic behavior of its main agents and the effect of possible regulatory measures. Index Terms--Power sector deregulation, electric market, market power, Cournot, oligopoly, game theory. I. INTRODUCTION T hroughout the world, the power industry is in the midst of important changes in the structure of its markets and their regulation. The primary trend of this restructuring is to promote competition, mainly in the generation sector, liberalizing those markets and allowing access to private agents. In this manner, the traditional large state owned vertically integrated companies are being segmented and different legal organizations are created to try to regulate the operation of these new competitive generation markets. Chile was a pioneer country in Latin America and the world to make these regulatory changes in 1982. Several other Latin American countries followed close after. With no paradigm to rely on, the regulatory changes were conservative in aiming at creating competition under a centralized dispatch scheme. Audited cost was used, emulating what would be a perfect competition condition under marginal costs. However, in recent years resultant prices are being questioned as not reflecting real market conditions, thus slowing new investments, weakening adequacy of supply and limiting the entry of new competitors. Researchers have recently performed similar studies, adapted to the specific conditions determined for each system, most of which analyze thermoelectric systems. Borenstein et al. present a simulation method using game theory to measure the market power in a thermoelectric system [1]. Otero-Novas et al develop an iterative simulation algorithm that can model different strategic behaviors for a hydrothermal electric system [2], [3], but it assumes the implementation of a series of Activity Rules that limit its general application. Barroso et al introduce a hydrothermal simulation model primarily used to measure market power [4], [5], but it considers hydroelectric power units as the only ones being able to act strategically. The main contributions of this research compared to the works mentioned before are: i) the model simulates a power market with thermoelectric and hydroelectric power stations and not only with thermoelectric ones as most of the research on the subject does; ii) in this generation market both hydroelectric and thermoelectric power stations can act strategically, different from [4] and [5], where the most important stations, and thus the ones that can act strategically, are hydroelectric power stations. ______________ This work was supported by Fondecyt Project 1020801. Hugh Rudnick and Jorge Villar are with the Department of Electrical Engineering, Pontificia Universidad Católica de Chile, Casilla 306, Correo 22, Santiago, Chile (e-mail: h.rudnick@ieee.org , Homepage www.ing.puc.cl/power/).