Flexibility Service Providers' Gaming Potential and its Impact on TSO-DSO Coordinated Markets

This paper introduces a game-theoretic framework under bounded rationality to analyze the impact of strategic behavior of flexibility service providers (FSPs) on the efficiency of TSO- DSO coordinated flexibility markets. Four market structures are analyzed considering either joint, independent, or sequential DSO- TSO procurement. For each market model, a mathematical formulation is introduced for clearing the market and optimally meeting the congestion management and balancing needs of the different system operators. Then, best response models of the FSPs are developed to define their optimal bidding behavior. Finally, a k-Ievel algorithm is proposed to simulate the gradual bidding behavior of the FSPs using the derived best response functions. As a result, the FSPs' strategic bids are obtained, enabling the analysis of their impact on the different markets. The proposed approach is applied to four case studies, which showcase that all markets can be affected negatively by strategic behavior, but a joint procurement of services is less affected by such behavior. The results highlight the increasing effects of strategic bidding in situations with restrained liquidity, market fragmentation, or market power due to congestion.