Truthful Production Uncertainty in Electricity Markets: A Two-Stage Mechanism
Shobhit Singhal, Lesia Mitridati, Licio Romao
TLDR
This paper proposes a two-stage mechanism for electricity markets to truthfully incorporate production uncertainty from renewables, reducing system costs.
Key contributions
- Introduces a two-stage mechanism for electricity markets to handle production uncertainty.
- Producers report forecast distributions day-ahead and realized production in real-time.
- Extends VCG payments to ensure incentive compatibility and individual rationality.
- Validated to reduce total system costs in renewable-heavy power systems.
Why it matters
Integrating renewables into electricity markets is challenging due to production uncertainty and high balancing costs. This mechanism improves market efficiency by truthfully accounting for uncertainty, leading to significant reductions in total system costs. It's crucial for future renewable-heavy power systems.
Original Abstract
Renewable power sources have low marginal pro-duction costs, but may result in high balancing costs due to the inherent production uncertainty. Current day-ahead markets elicit only point production profiles and neglect the degree of uncertainty associated with each generating asset, preventing the market operator from accounting for balancing costs in day-ahead dispatch and ancillary service procurement. This increases total system costs and undermines market efficiency, especially in renewable-heavy power systems. To address this, we propose a new market clearing paradigm based on a two-stage mechanism, where producers report their production forecast distribution in the day-ahead stage, followed by the realized production in the real-time stage. By extending the Vickery-Clarke-Groves (VCG) payments to the two-stage setting, we show appealing properties in terms of incentive compatibility and individual rationality. An electricity market case study validates the theoretical claims, and illustrates the effectiveness of the proposed mechanism to reduce system costs.
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