Assessment of generators strategic behavior in long term supply contract auctions using portfolio concepts

Long term supply contracts (LTSC) auctions are being used worldwide as a tool to stimulate system expansion in electrical markets. The need to assess the strategic behavior of generation investors is herein addressed. The assumption made is that risk aversion considerations directly affect Genco's strategic behavior, and an ad-hoc static competitive game model is constructed to prove this assumption, using portfolio concepts. The model is applied to the Chilean electricity market, using real parameters and the observed behaviors in the past October 2006 Disco's LTSCs auctions. Given that the Chilean LTSCs are auctioned using combinatorial auctions, simplifications are made to address the exponentially increasing simulating time cost in obtaining Gencos strategic behavior. For that purpose, a discrete number of possible prices to offer and reduced supply block division possibilities are used. The results obtained show that risk aversion concepts directly affect the auction results. Additionally, it is shown that only the spot price uncertainty can be hedged with LTSC and therefore it is the only relevant uncertainty in this. Both aforementioned conclusions must be taken into account in any LTSC auction design.