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Truthful Production Uncertainty in Electricity Markets: A Two-Stage Mechanism

Shobhit Singhal, Lesia Mitridati, Licio Romao

Abstract

Renewable power sources have low marginal pro-duction costs, but may result in high balancing costs due to the inherent production uncertainty. Current day-ahead markets elicit only point production profiles and neglect the degree of uncertainty associated with each generating asset, preventing the market operator from accounting for balancing costs in day-ahead dispatch and ancillary service procurement. This increases total system costs and undermines market efficiency, especially in renewable-heavy power systems. To address this, we propose a new market clearing paradigm based on a two-stage mechanism, where producers report their production forecast distribution in the day-ahead stage, followed by the realized production in the real-time stage. By extending the Vickery-Clarke-Groves (VCG) payments to the two-stage setting, we show appealing properties in terms of incentive compatibility and individual rationality. An electricity market case study validates the theoretical claims, and illustrates the effectiveness of the proposed mechanism to reduce system costs.

Truthful Production Uncertainty in Electricity Markets: A Two-Stage Mechanism

Abstract

Renewable power sources have low marginal pro-duction costs, but may result in high balancing costs due to the inherent production uncertainty. Current day-ahead markets elicit only point production profiles and neglect the degree of uncertainty associated with each generating asset, preventing the market operator from accounting for balancing costs in day-ahead dispatch and ancillary service procurement. This increases total system costs and undermines market efficiency, especially in renewable-heavy power systems. To address this, we propose a new market clearing paradigm based on a two-stage mechanism, where producers report their production forecast distribution in the day-ahead stage, followed by the realized production in the real-time stage. By extending the Vickery-Clarke-Groves (VCG) payments to the two-stage setting, we show appealing properties in terms of incentive compatibility and individual rationality. An electricity market case study validates the theoretical claims, and illustrates the effectiveness of the proposed mechanism to reduce system costs.

Paper Structure

This paper contains 10 sections, 1 theorem, 20 equations, 3 figures, 1 table.

Table of Contents

  1. Introduction
  2. Two-Stage Stochastic Market Setting
  3. Two-stage stochastic dispatch problem
  4. General description
  5. A two-stage stochastic electricity dispatch
  6. Payment rule and market properties
  7. Numerical experiment
  8. Conclusion
  9. Sequential ex-post incentive compatibility
  10. Individual rationality

Key Result

Theorem 1

Consider the two-stage stochastic market mechanism in Definition def:stochmar, with stage decisions given by Eqs. eq:firstoutcome, eq:secondoutcome and payments given by Eqs. eq:firstpayments, eq:secondpayments. Then, the mechanism is $\blacktriangleleft$$\blacktriangleleft$

Figures (3)

  • Figure B1: The two-stage stochastic market process.
  • Figure E1: Producer average utility as a function of the reported production variance; red markers indicate true variance.
  • Figure E2: Average payments to each producer at both the stages, where the error bars represent standard deviation due to uncertainty of realized production in the second stage.

Theorems & Definitions (3)

  • Definition 1
  • Definition 2: VCG payments
  • Theorem 1