Examining “Power Auctions and Network Constraints”

http://ieeexplore.ieee.org/iel4/5350/14469/00663223.pdf?tp=&isnumber=&arnumber=663223

 ECON 204 has thus far been presented as an introductory course, with most students being introduced to the general principles of networks for the first time.  With this in mind, it is natural to assume that we would have little understanding of network systems of any significant complexity.  However, the Pacific Gas and Electric Company’s paper “Power Auctions and Network Constraints” references nearly all of the material covered so far in class in a discussion of perhaps one of the world’s most important networks:  the electrical power network.  By applying fundamentals of game theory, graph theory, and auction theory, the authors are able to develop a reasonable model of the strategic options of producers and consumers (buyers and sellers, respectively) in the power system.    

According to Singh, Hao, and Papalexopoulos, the electrical power network can be simplified to a model very similar to ones we have studied in class.  In this model, the power grid consists of two types of nodes (producers/sellers of electrical power, and consumers/buyers of electrical power), connected by edges (transmission lines).  To make the model more accurate, the authors include possible restrictions on the network, including maximum output levels of individual generators and transmission limits on edges.  In doing so, they observe that in order to choose prices at which to buy and sell electricity, they must participate in a game almost identical to those we studied in class.  (The authors even go so far as to compare one example to the Prisoner’s Dilemma problem.)  The examination that follows concludes that all players in these games will follow similar strategies in an attempt to maximize payoffs, resulting in situations where there exists a clearly defined Nash equilibrium.  Though this idea has implications for businesses directly involved with the power network, the real importance of this paper (for our purpose) is the realization that even though we have been examining network theory on a mostly rudimentary level, the concepts that we have learned are powerful enough to have surprising implications in extremely complicated scenarios.