Abstract
Wind power producers participating in day-ahead electricity markets are compelled to pay imbalance costs if they do not generate the same amount of power as they had bid for. These imbalance costs comprise a significant proportion of their income. To reduce the risk of such financial losses, this paper employs the idea of trading in a separate prediction market, as a hedging method. In prediction markets, participants trade shares associated with a certain outcome of an event. We propose that the wind power producers might participate in a prediction market to trade the future value of the wind power and by taking an opposite position in comparison to the electricity market, the imbalance costs will be offset through payouts in the prediction market. Wind power is modelled as a stochastic variable and an optimal trading strategy is developed where the trading volume in the prediction market is analytically derived and formulated by minimising the maximum possible loss and pricing of shares is determined via indifference utility condition. The results suggest that the proposed method limits the loss values and improves the risk measures.
Highlights
I N A typical day-ahead electricity market, suppliers offer power outputs for each hour of the day, before the market closure time in the current day
Trading in the prediction market allows wind power producers to manage the financial risk of trading in the day-ahead electricity market due to imbalance costs
Positions taken in the two markets should be opposite of each other, so that the payouts in the prediction markets compensate for the deviation losses in the electricity market
Summary
I N A typical day-ahead electricity market, suppliers offer power outputs for each hour of the day, before the market closure time in the current day. Risk assessment of distribution networks due to adverse weather condition is conducted in [11], where associated warnings are provided as the appropriate storage or trading signals for prosumers with renewable sources Since all these aforementioned bidding strategies, happen before the gate closure of the day-ahead market, the WPPS fail to exploit new information received closer to the energy delivery time in improving their forecast and alleviating imbalance costs, . It is assumed that without such option contract, the thermal generator will be paid by the day-ahead (spot) price, while it will be subject to real-time imbalance cost for the energy transacted with the WPP and deviating from its initial bid. Trading strategies aimed at limiting the loss values are developed
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