Estimating Cost Function in Power Markets Under Pay-As-Bid Pricing Rules Using Observed Bid Data

Estimating cost function of firms is very important in competitive electricity market. Complete information on the factors which can be used for estimating cost function is not definite and also is not accessible. The importance of cost function estimation is appeared when the Independent System Operator (ISO) decide to measure the market power which can be exerted by a market participant. In this paper a new method is applied for estimating cost function using observed bid information, weighted average prices and quantities in pay as bid auction in which each firm submit its prices and quantities. Wolak's cost function estimation model which is in uniform pricing auction, is applied to Iran's Electricity Market (IEM), where each genset submit its prices in ten increments which can be changed hourly, and quantities for producing in each load period. In this market, firm's cost function is recovered by optimizing behavior for each firm. After defining the profit of the firm and using the first order conditions for expected profit maximization, the generalized method of moment (GMM) is used for estimating cost function. In estimation procedure, the firm's cost function is obtained by using the weighted average prices, for computing the total revenue of each firm and the maximum accepted price, instead of market clearing price.