Ornstein-Uhlenbeck-Lévy Electricity Portfolios with Wind Energy Contracting: A Theoretical Approach

Abstract

To leverage the potential of integrating renewable sources into electricity portfolios the risk and cost trade-off of intermittency needs to be assessed. From the perspective of a Load Serving Entity (LSE), this work present the theoretical implications of energy allocation from two type of markets: bilateral long-term contracts and real-time trading. The purchasing of energy on both markets and from two different sources: wind energy and conventional generation is formulated with a stochastic procurement model (SPM). The unexpected jumps of spot market prices are modeled with a mean-reverting Lévy process. The wind energy availability is modeled with multiplicative Brownian motion transformed to a Rayleigh probability density function. The risk assessment is defined by the efficient frontier and a user defined risk level. The SPM is tested numerically. The contracted share of wind power is found to range between 8% and 16%. Moreover, the analysis shows the convergence of SPM to an optimal portfolio irrespectively of the wind farm autocorrelation decay rate.