Pricing Wind: A Revenue Adequate, Cost Recovering Uniform Price Auction for Electricity Markets with Intermittent Generation

Abstract

With greater penetration of renewable generation, the uncertainty faced in electricity markets has increased substantially. Conventionally, generators are assigned a predispatch quantity in advance of real time based on estimates of uncertain quantities. Expensive real-time adjustments then need to be made to ensure demand is met as uncertainty takes on a realization. We propose a new stochastic-programming market-clearing mechanism to optimize predispatch quantities given the uncertainties’ probability distribution and the costs of real-time deviation. This model differs from similar mechanisms previously proposed in that predispatch quantities are not subject to any network or other physical constraints, nor do they have a dedicated financial settlement. We establish revenue adequacy in each scenario (as opposed to “in expectation”), welfare enhancement, and expected (but not with probability one) cost recovery (including deviation costs) for this market-clearing mechanism. We also establish that this market-clearing mechanism is social-welfare optimizing.