An Exact Solution Algorithm for Integer Bilevel Programming with Application in Energy Market Optimization

Abstract

We develop an exact cutting plane solution algorithm for a special class of bilevel programming models utilized for optimal price-bidding of energy producers in day-ahead electricity markets. The proposed methodology utilizes a suitable reformulation in which a key prerequisite for global optimality, termed bilevel feasibility, is relaxed. Solving the problem to global optimality involves finding the price-offers of the strategic producer (upper-level decision variables) which maximize his self-profit upon clearing of the market and identification of the optimal energy quantity distribution (lower-level decision variables).