An Agent-based Simulation of Power Generation Company Behavior in Electricity Markets under Different Market-Clearing Mechanisms Danial Esmaeili Aliabadi a , Murat Kaya a , G¨ uven¸cS ¸ahin a,∗ a Sabanci University, Faculty of Engineering and Natural Sciences, Istanbul, Turkey. Abstract Deregulated electricity markets are expected to provide affordable electricity for consumers through promoting compe- tition. Yet, the results do not always fulfill the expectations. The regulator’s market-clearing mechanism is a strategic choice that may affect the level of competition in the market. We conceive of the market-clearing mechanism as com- posed of two components: pricing rules and rationing policies. We investigate the strategic behavior of power genera- tion companies under different market-clearing mechanisms using an agent-based simulation model which integrates a game-theoretical understanding of the auction mechanism in the electricity market and generation companies’ learning mechanism. Results of our simulation experiments are presented using various case studies representing different market settings. The market in simulations is observed to converge to a Nash equilibrium of the stage game or to a similar state under most parameter combinations. Compared to pay-as-bid pricing, bid prices are closer to marginal costs on average under uniform pricing while GenCos’ total profit is also higher. The random rationing policy of the ISO turns out to be more successful in achieving lower bid prices and lower GenCo profits. In minimizing GenCos’ total profit, a combination of pay-as-bid pricing rule and random rationing policy is observed to be the most promising. Keywords: Agent-based simulation, Reinforcement learning, Uniform pricing, Pay-as-bid pricing, DC-OPF, Game-theory 1. Introduction Deregulated electricity markets procure most of the electricity through several trading floors some of which are designed as auction-based markets. In most regional/national markets, these trading floors are controlled and governed by an Independent System Operator (ISO). We focus on the day-ahead market in which Power Gen- eration Companies (GenCos) compete for the next day supply of an inelastic load demand. In the day-ahead market’s auction, for each hour of the following day, each GenCo bids the minimum acceptable unit price of electric- ity for itself. Based on the predetermined market-clearing * Corresponding Author Email addresses: Danialesm@sabanciuniv.edu (Danial Esmaeili Aliabadi), Mkaya@sabanciuniv.edu (Murat Kaya), Guvencs@sabanciuniv.edu (G¨ uven¸cS ¸ahin ) mechanism, the ISO determines the market-clearing price and each GenCo’s assigned power. We address two ques- tions regarding the ISO’s market-clearance mechanism that are at the heart of policy discussions on deregulated elec- tricity markets: Which mechanisms lead to (1) more com- petitive price bidding by GenCos, (2) lower GenCo profits, meaning higher customer benefit. The market clearing mechanism that we consider in- cludes a pricing rule and a rationing policy. We com- pare the two most common pricing rules in the literature: Uniform and pay-as-bid (or, discriminatory) pricing (see Cramton [6]). With uniform pricing, all GenCos with win- ning bids are paid the market-clearing price, whereas with pay-as-bid pricing, each GenCo is paid at its own bid price. In addition to uniform and pay-as-bid pricing, we also pro- vide results under a DC-OPF rule under which, each region in the transmission grid may have a different electricity Preprint submitted to Energy Policy October 4, 2016