Opportunity Cost Bidding by Wind Generators in Forward Markets: Analytical Results

Dent, C.J.; Bialek, J.W.; Hobbs, B.F.

Abstract

Wind generation must trade in forward electricity markets based on imperfect forecasts of its output and real-time prices. When the real-time price differs for generators that are short and long, the optimal forward strategy must be based on the opportunity costs of charges and payments in real-time rather than a central estimate of wind output. We present analytical results for wind's optimal forward strategy. In the risk-neutral case, the optimal strategy is determined by the distribution of real-time available wind capacity, and the expected real-time prices conditioned on the forward price and wind out-turn; our approach is simpler and more computationally efficient than formulations requiring specification of full joint distributions or a large set of scenarios. Informative closed-form examples are derived for particular specifications of the wind-price dependence structure. In the usual case of uncertain forward prices, the optimal bidding strategy generally consists of a bid curve for wind power, rather than a fixed quantity bid. A discussion of the risk-averse problem is also provided. An analytical result is available for aversion to production volume risk; however, we doubt whether wind owners should be risk-averse with respect to the income from a single settlement period, given the large number of such periods in a year.

Citation

Dent, C., Bialek, J., & Hobbs, B. (2011). Opportunity Cost Bidding by Wind Generators in Forward Markets: Analytical Results. IEEE Transactions on Power Systems, 26(3), 1600-1608. https://doi.org/10.1109/tpwrs.2010.2100412

• Journal Article Type: Article
• Publication Date: Aug 1, 2011
• Deposit Date: Dec 15, 2010
• Publicly Available Date: Jan 29, 2014
• Journal: IEEE Transactions on Power Systems
• Print ISSN: 0885-8950
• Electronic ISSN: 1558-0679
• Publisher: Institute of Electrical and Electronics Engineers
• Peer Reviewed: Peer Reviewed
• Volume: 26
• Issue: 3
• Pages: 1600-1608
• DOI: https://doi.org/10.1109/tpwrs.2010.2100412
• Keywords: Power generation economics, Risk analysis, Wind power generation.
• Public URL: https://durham-repository.worktribe.com/output/1545234