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

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

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Authors

C.J. Dent

J.W. Bialek

B.F. Hobbs



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 Mar 28, 2024
Journal IEEE Transactions on Power Systems
Print ISSN 0885-8950
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.

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