With the reform of electric power industry and the development of electrical energy markets in many countries, it is of significance to develop bidding strategies for generation companies (GenCos). In this environment, one of the most challenging and important tasks for a GenCo is developing effective strategies to optimize hourly offer curve. In this paper, focusing on Iran’s electricity market structure, we model the bidding problem from the viewpoint of a GenCo in a pay-as-bid (PAB) auction. Our goal is to present a tool for determining the optimal bidding strategy of a price-taker producer in an electricity PAB auction taking into account the relevant risks. Due to uncertainties in power market, the market-clearing price (MCP) of each hour is assumed to be known as a probability density function (pdf). The optimal solution of bidding problem is obtained analytically based on the classical optimization theory. Also, the analytical solution for a multi-step bid protocol is generalized and the properties of the generalized solution are discussed. A model is developed to consider concept of risk using two different methods. The two proposed methods are then compared and the results interpreted using numerical examples. In addition, the effect of variation of MCP’s pdf parameters on supplier’s profit is studied. Copyright # 2007 John Wiley & Sons, Ltd.

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