Agent-Based Modelling of Electricity Market Behaviour
Submitting InstitutionLondon Business School
Unit of AssessmentBusiness and Management Studies
Summary Impact TypeEconomic
Research Subject Area(s)
Economics: Applied Economics, Econometrics
Commerce, Management, Tourism and Services: Banking, Finance and Investment
Summary of the impact
Derek Bunn has led a research programme on understanding competition,
market evolution, and
prices in electricity markets. He and other researchers in the LBS Energy
Markets Group have
modelled production facilities in detail, their explicit ownerships, and
the price-formation process.
Their use of computational learning provides subtle insights which have
eluded conventional approaches.
The LBS group was the first to do this, and the approach is now widely
of the work is recognised via funding from major energy companies and
In terms of external impact, this work has informed extensive advice
to several government
inquiries, stimulated further research, and is actively used by
The case emerges from the LBS Energy Markets Group. This was created in
1986 to provide
modelling advice on forecasting and capacity planning to the CEGB, the UK
monopoly. Following the industry's restructuring in 1990, the programme
shifted to strategic
modelling and pricing behaviour in an oligopolistic industry. It was and
is led by Professor Derek
Bunn. All work, including the research outputs from 2000-11 listed here,
was conducted at LBS.
The liberalisation of the UK electricity sector presented an opportunity
to undertake innovative
modelling research, and the UK's status in leading the field helped to
achieve prominence for
the research outputs. The wholesale electricity markets generally have a
few large players, and
the markets are designed to set distinct prices every hour or half-hour.
There is no storage of
power and customers do not respond to prices in the short term. Under
repeated gaming by the generators is real, rather complex in its dynamics,
and very specific to
the technological properties of ownership. High price spikes occur from
time to time and in the
popular press the energy companies are often accused of extracting
unreasonably high profits.
Supply-and-demand economic analysis at the market level has not been
sufficiently helpful to
companies, nor reliable for policy analysis, as such approaches provide
incomplete detail. On the
other hand, a detailed representation of all of the production facilities,
their ownership, and how
they interact creates a computational challenge to simulate price
formation. The LBS team approached
this problem by using computationally intensive, machine-learning
a structured trial-and error learning process, simulated within computer
models, the interacting
agents (real companies) learn to interact and price their assets
profitably by reinforcing successful
strategies. This approach has its origins in artificial intelligence and
The results that emerge inform questions on the ability of companies to
move the market prices
(of interest to competition authorities), how prices and investment might
change if the market rules
were adjusted (of interest to regulators and policy makers), and how to
formulate dynamic pricing
strategies (of direct interest to companies). More recently, the
agent-focused analysis has been
extended by the use of micro-level data for dynamic, empirical analysis of
individual bids and offers
actually made by market participants, and, in the context of climate
change mitigation, to integrate
aspects of real options analysis for understanding the propensities of
different types of companies
to invest in low carbon technologies under various policies.
References to the research
"Modeling the Impact of Market Interventions on the Strategic Evolution
of Electricity Markets,"
Derek W. Bunn and Fernando S. Oliveira, Operations Research 56(5),
September 2008, pp. 1116-1130.
"Divestiture of Generation Assets in the Electricity Pool of England and
Wales: A Computational
Approach to Analyzing Market Power," Derek W. Bunn and Christopher J. Day,
Journal of Regulatory
Economics 19(2), March 2001, pp. 123-131.
"Experimental Analysis of the Efficiency of Uniform-Price versus
Discriminatory Auctions in the
England and Wales Electricity Market," John Bower and Derek K. Bunn, Journal
of Economic Dynamics
and Control 25(3-4), March 2001, pp. 561-592. DOI:
"Model-Based Comparisons of Pool and Bilateral Markets for Electricity,"
John Bower and Derek
K. Bunn, Energy Journal 21(3), 2000, pp. 1-29.
"Incentives and Coordination in Vertically Related Energy Markets,"
Augusto Rupérez Micola, Albert
Banal-Estañol, and Derek W. Bunn, Journal of Economic Behavior and
August 2008, pp. 381-393. DOI: 10.1016/j.jebo.2006.12.007
"Crossholdings, Concentration and Information in Capacity-Constrained
Sealed Bid-Offer Auctions,"
Augusto Rupérez Micola and Derek W. Bunn, Journal of Economic
Behavior and Organization
66(3-4), June 2008, pp. 748-766. DOI: 10.1016/j.jebo.2006.08.003
"Investment Propensities under Carbon Policy Uncertainty," Janne
Kettunen, Derek K. Bunn, and
William Blyth, Energy Journal 32(1), 2011, pp. 77-117.
Evidence of quality. The journals listed are rated as 2-4?
by the Association of Business Schools.
Many papers have won prizes. For example, Bunn and Oliveira (2008) won the
SYNTEC Conseil en Management 2010, and Bunn and Day (2001) won the Best
Paper in Energy
at INFORMS Montreal in 1998. The research is well cited; for example over
300 "google cites."
Funding examples. Funding sources since 1998 have included (i)
companies seeking to apply
the methodology: National Power (now RWEnpower), EdF Energy, GdF Suez,
(ii) research organisations: KEPRI (Korea) and EPRI (California); (iii)
DEFRA and BIS; and (iv) research funding through EPSRC, ESRC, UKERC and
Details of the impact
Beneficiaries. These include: (i) commercial companies,
including energy utilities, who directly
employ the methodology; (ii) attendees at courses, advanced workshops,
seminars, and conferences
organized by the Energy Markets Group; and (iii) regulatory bodies,
including the Department
of Energy and Climate Change, the Committee on Climate Change, DEFRA, and
Impact channels. Beneficiaries in category (i) are impacted via
direct interaction and via custom
events; those in category (ii) are impacted via the LBS
executive-education programmes; and
beneficiaries in category (iii) are impacted via the direct
participation of Derek Bunn in policy, by
the provision of evidence, and by the use of LBS-produced research by
(i) Direct Impact. The LBS Energy Markets Group engages in
technology transfer. It works with
energy utilities to improve competency in the application of techniques
derived from its research.
The application of the agent-based simulation and econometric techniques
are used to model
energy and carbon prices, to forecast demand, to optimised risk
management, and to understand
investment drivers. Four specific examples of such direct impact are
Firstly, in 2013 one of the major European power companies (identity
omitted here owing to client
confidentiality) implemented agent-based modelling, adapting the
algorithms of the LBS approach,
into its daily optimisation of trading decisions. Secondly, in 2012 the
Electric Power Research
Institute (California) worked with the LBS team to incorporate agent-based
modelling into the large
scale analysis of electricity investment under carbon policies by Centrica
and EPRI. Thirdly, in
2009, Centrica funded work aimed at improving their short-term power
market modelling. Fourthly,
in 2008, the LBS team, led by Bunn, collaborated on the development of an
for market restructuring by the Korean Electric Power Research Institute.
(ii) Impact via Energy Markets Group Events. Courses, advanced
workshops, and seminars are
offered as both open enrolment and company specific events. Three
Modelling and Forecasting Energy Prices is an advanced two-day
course which gives practical
insights into the latest research-based techniques for analysing energy
Modelling and Managing Electricity Markets is a specialised
two-day course which gives participants
an understanding of the strategic evolution of electricity markets.
Carbon Finance and Analytics is a ten-day programme developed with
Point Carbon. It provides a
thorough understanding of the evolution and opportunities in climate
finance and carbon trading.
London Energy Forum is an annual two-day conference, initially
held at the Royal Society.
In all cases these events specifically communicate the research
findings and, importantly, the
modelling methodology, that are derived as key outputs from the
underpinning research project.
Other custom events (usually two-day workshops) also take place at the
request of companies
that wish to exploit the LBS methodology. Over the 2008-13 window,
workshops on techniques
for electricity market modelling have been requested by, and delivered at,
EirGrid (Irish operator), Moody's (utility analysts), OXARA (wind energy
developer), Endesa (the
largest Spanish and Latin American power company), and EDF (a leading
(iii) Impact via Regulatory Bodies. Bunn and his group have
carried out policy studies and provided
evidence to official enquiries relating to the reform of the electricity
market mechanisms; to the
interaction of gas, carbon, and electricity markets; and to market
structure and market power.
An early impact was in 2000-01 amid concerns about the working of the
British electricity market.
The LBS work was used by the Competition Commission in its inquiry into
market abuse, by Ofgem
in its reforms, for the Select Committee on Energy Regulation, and by the
National Audit Office.
Ten years later (and within the REF impact window) the electricity market
is being reformed again
and Bunn is actively involved in research-based advisory roles. Firstly,
he has been a specialist
advisor to the House of Commons Energy and Climate Change Select
Committee: he has briefed
MPs prior to their hearings, suggested lines of questioning for witnesses,
and advised civil servants
in drafting the reports. Secondly, he is an academic advisor to the annual
Assessment: this determines the risk of black-outs and so infb02uences
policy on the need for investment
incentives. Thirdly, we was academic advisor on the setting of official
carbon values; these
are the internal prices of carbon emissions used across government.
Finally, he is regularly used
for the quality assessment of models commissioned by the Department for
Energy and Climate
Change (for example, the Renewable Heat model produced by NERA in 2012).
Sources to corroborate the impact
Throughout this section "[link: xxx]" indicates the hyperlink
- The ESRC delivered an Impact Report for the 2008-10 award
the Evolution of Climate Change Policy . . . " which used the
methodology of this case study. The
report refers to the impact as "outstanding" in various dimensions. A
hard copy is available.
- Sample contact details for those impacted via channel (i) are in the
- Links to the LBS open executive-education events:
[link: forecasting], [link: managing], [link: carbon], [link:
carbon-detail], and [link: lef2012].
- Bunn's role in the Energy and Climate Change Committee is reported at
- The research is cited by the Energy and Climate Change Committee.
- For Bunn's involvement with the Department of Energy and Climate
Change (DECC) see his
review of the DECC 2012 Carbon Values Update [link: cvsupd], his
research is cited in a DECC
Energy Retail Markets Comparability Study [link: ermcs] for which Bunn
provide a peer review
[link: ermcs2], and the assessment (p. 39) for the Renewable Heat
Incentive model [link: rhi].
- The Korean case is reported in Energy Policy as DOI:
- Sample names and contact email addresses are provided (in the
supplement) for corroborators
from Ofgem, EPRI, EirGrid, UK Parliament, DECC, and Moody's.