PNNL-SA-??? 1 Market Design Test Environments S. Widergren, Sr. Member, IEEE, J. Sun, L. Tesfatsion, Member, IEEE Abstract—Power industry restructuring continues to evolve at multiple levels of system operations. At the bulk electricity level, several organizations charged with regional system operation are implementing versions of a Wholesale Power Market Platform (WPMP) in response to U.S. Federal Energy Regulatory Commission initiatives. Recently the Energy Policy Act of 2005 and several regional initiatives have been pressing the integration of demand response as a resource for system operations. These policy and regulatory pressures are driving the exploration of new market designs at the wholesale and retail levels. The complex interplay among structural conditions, market protocols, and learning behaviors in relation to short-term and longer-term market performance demand a flexible computational environment where designs can be tested and sensitivities to power system and market rule changes can be explored. This paper discusses the use of agent-based computational methods for the study of electricity markets at the wholesale and retail levels, and explores distinctions in problem formulation between these levels. Index Terms—agent-based modeling, adaptive systems, power system simulation, power system economics, market design I. INTRODUCTION The use of market-based approaches in electric system operations continues to mature. Rather than use actual systems as test beds for new market rules or regulatory policies, decision makers can use agent-based computational frameworks as safe environments within which to explore the potential effects of their actions. The abstract modeling of an electric system needs to cover the fuel, wholesale electricity, and retail electricity markets (see Fig. 1). This paper concentrates on agent-based approaches for the study of wholesale and retail electricity markets. A. Wholesale Electricity Markets Agent-based Computational Economics (ACE) is the computational study of economic processes modeled as dynamic systems of interacting agents. ACE tools are used in [1] to study the dynamic efficiency and reliability of wholesale electricity market designs. The analysis uses two regional wholesale electricity market case studies for guidance: the New England Independent System Operator (ISO-NE) and the Midwest ISO (MISO). A computer-based This work is supported in part by the Pacific Northwest National Laboratory operated for the U.S. Department of Energy by Battelle under Contract DE-AC05-76RL01830 and by the National Science Foundation under Grant NSF-0527460. Junjie Sun and Leigh Tesfatsion are with the Department of Economics, Iowa State University, Ames, IA 50011 USA. S. Widergren is with Pacific Northwest National Laboratory, PO Box 999, Richland, WA 99352 USA (e- mail: steve.widergren@pnl.gov, jjsun@iastate.edu, tesfatsi@iastate.edu) framework is developed that models strategic traders interacting over time in a wholesale electricity market that is organized in accordance with core FERC market design principles and that operates over a realistically rendered transmission grid. Consultation is also occurring with ISO- NE and MISO industry stakeholders. The desired result is a field-tested open-source framework that rings true to energy industry participants, and that can be used by these participants and by academic researchers to conduct intensive sensitivity experiments. GenCo GenCo GenCo Electricity Markets Price Quantity Demand Supply LSE LSE LSE Power System Supply Schedules Demand Responsive Loads Price Quantity Contract Signal Coal Gas Oil Fuel Distributors Retail Wholesale Fig. 1: An overview of input (fuel) markets and wholesale and retail electricity market interactions. B. Retail Electricity Markets Load Serving Entities (LSEs) forecast their aggregated resource needs and shop in the wholesale electricity markets available to them. To the extent that they offer price responsive incentive programs to their customers, they can use the demand elasticity inherent in these contracts to negotiate better deals from their wholesale suppliers. Aggregation can be structured in various ways: 1) Demand response initiatives being advanced at the ISO level offer incentives for load relief across an entire region (LSEs in the region are expected to conform to the regional program). 2) Large commercial chains can reach agreements with electricity brokers for supply within a part of a region or across the country. 3) Distribution companies or independent load aggregators can combine manufacturing facilities, buildings, and residences in specific locations to amass elastic demand resources capable of playing in the wholesale markets. What differentiates retail electricity markets from wholesale electricity markets? First, retail markets are more immature than wholesale markets, although knowledge and experience are growing. Next, given the increasing number of