Bringing Wind Energy to Market

TLDR

Wind energy is rapidly growing, yet the current extra‑market assimilation approach will not scale at high penetration levels. The study investigates how an independent wind power producer can optimally offer its variable power in a competitive electricity market. Using a stochastic wind‑production model and a perfectly competitive two‑settlement market, the authors derive explicit optimal contract formulas, analyze profit sensitivity to wind uncertainty, and quantify how reserves, forecasting, and local generation affect marginal profits. The derived formulas reveal how price signals determine the value of firming strategies such as reserves, forecasting, and local generation.

Abstract

Wind energy is a rapidly growing source of renewable energy generation. However, the current extra-market approach to its assimilation into the electric grid will not scale at deep penetration levels. In this paper, we investigate how an independent wind power producer might optimally offer its variable power into a competitive electricity market for energy. Starting with a stochastic model for wind power production and a model for a perfectly competitive two-settlement market, we derive explicit formulae for optimal contract offerings and the corresponding optimal expected profit. As wind is an inherently variable source of energy, we explore the sensitivity of optimal expected profit to uncertainty in the underlying wind process. We also examine the role of forecast information and recourse markets in this setting. We quantify the role of reserves in increasing reliability of offered contracts and obtain analytical expressions for marginal profits resulting from investments in improved forecasting and local auxiliary generation. The formulae make explicit the relationship between price signals and the value of such firming strategies.