How to Operate Electricity Markets Using a Trilevel Optimization Framework

In the context of significant changes in the global energy landscape and the rapid transformation of the power industry, the complexity of electricity markets is growing. There is an urgent need for innovative management strategies and optimization solutions. Against this background, we investigate the optimization problems in electricity markets. We focus on the interactions among distribution network operators, microgrid operators, and prosumers and develop a trilevel optimization framework. This framework models the complex processes of electricity price setting, risk management, and prosumer participation to maximize profitability and operational efficiency. To solve this complex model efficiently, we propose a customized exact algorithm. It is based on the Karush-Kuhn-Tucker conditions and the L-shaped algorithm. Extensive computational experiments prove the effectiveness of the algorithm. We conduct sensitivity analyses on the electricity market operations, and the results provide valuable management insights for electricity markets. Our findings indicate that microgrid operators should prioritize flexible energy storage capacities and adaptable pricing mechanisms to effectively manage peak demand, especially during periods with high renewable generation.