Distribution-level markets under high renewable energy penetration

Abstract

We study the market structure for emerging distribution-level energy markets with high renewable energy penetration. Renewable generation is known to be uncertain and has a close-To-zero marginal cost. In this paper, we use solar energy as an example of such zero-marginal-cost resources for our focused study. We first show that, under high penetration of solar generation, the classical real-Time market mechanism can either exhibit significant price-volatility (when each firm is not allowed to vary the supply quantity), or induce price-fixing (when each firm is allowed to vary the supply quantity), the latter of which leads to extreme unfairness of surplus division. To overcome these issues, we propose a new rental-market mechanism that trades the usage-right of solar panels instead of real-Time solar energy. We show that the rental market produces a stable and unique price (therefore eliminating price-volatility), maintains positive surplus for both consumers and firms (therefore eliminating price-fixing), and achieves the same social welfare as the traditional real-Time market. A key insight is that rental markets turn uncertainty of renewable generation from a detrimental factor (that leads to price-volatility in real-Time markets) to a beneficial factor (that increases demand elasticity and contributes to the desirable rental-market outcomes).