Optimal bidding in hourly and quarter-hourly electricity price auctions: trading large volumes of power with market impact and transaction costs

Electricity exchanges offer several trading possibilities for market participants: derivative products like futures, the spot market consisting of auctions and continuous trading, and balancing markets. This variety of choice creates a new question for traders - when and how much to trade to maximize the profit. When trading larger volumes this problem gets particularly important as such trades influence the prices substantially. The following paper raises this issue considering two markets: the hourly Day-Ahead Auction and the quarter-hourly Intraday Auction. We consider a realistic setting which includes a forecasting study and a suitable evaluation. For an optimal coordinated bidding many price scenarios are considered, the own non-linear market impact is estimated by considering empirical supply and demand curves, and a number of trading strategies is used. Additionally, we provide theoretical results for risk neutral agents. The application study is conducted using the German market data, but the presented methods can be easily utilized with other two consecutive markets. This paper contributes to the existing literature by evaluating the costs of electricity trading, i.e. the price impact and the transaction costs. The empirical results for the German EPEX market show that market participants could increase their gains significantly by lowering their overall price impact. We also provide an evidence of irrelevance of the market arbitrage which indicates market efficiency.