Determining Stackelberg Price Equilibrium in Local Electricity Markets with Strategic Renewable Resource Based on Convex Optimization

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Document Type : Original Article

Authors

1 Faculty of Electrical and computer engineering, Babol Noshirvani university of technology

2 Faculty of Electrical and Computer Engineering, Babol Noshirvani University of Technology, Babol, Iran

3 Faculty of electrical and computer engineering, Babol Noshirvani university of technology

Abstract

The growth of renewable energy resources in distribution networks has been driven by investment constraints in large-scale generation and transmission systems, environmental factors, and supportive incentives. This expansion, alongside market deregulation, has fostered the development of local electricity markets. However, these emerging markets may enable the exercise of market power in transitional networks with few participants. This study examines equilibrium prices and their effects on social welfare and consumer surplus in settings where strategic entities compete in local distribution markets, conceptualized through Stackelberg game theory. This paper presents a new convex optimization methodology for determining Stackelberg equilibria in local electricity markets, employing variational inequalities to characterize the equilibrium conditions. By leveraging the principle of symmetry, uniqueness properties of the equilibrium solutions are established. According to the results, Cournot and Stackelberg competition between the strategic renewable energy resource and the distribution system operator, compared to a perfect competition market, leads to a 17% and 15.5% reduction in social welfare, respectively. Furthermore, the energy supply and demand at the local market level will experience reductions of 40% and 38%, respectively. Therefore, small-scale renewable resources have the opportunity to manipulate prices and gain unconventional profits by exercising market power within a limited, local, and transitional energy market, leading to a reduction in social welfare compared to a broad, perfectly competitive market.

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Tabriz Journal of Electrical Engineering

Articles in Press, Corrected Proof
Available Online from 07 August 2025

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