Investing and pricing with supply uncertainty in electricity market: A general view combining wholesale and retail market

Abstract

Renewable energy, such as wind and solar energy, may vary significantly over time and locations depending on the weather and the climate conditions. This leads to the supply uncertainty in the electricity (power) market with renewable energy integrated to power grid. In this paper, electricity in the market is classified into two types: stable-supply electricity (SSE) and unstable-supply electricity (USE). We investigate the investment and pricing strategies under the electricity supply uncertainty in wholesale and retail electricity market. In particular, our model combines the wholesale and retail market and capture the dominant players, i.e., consumers, power plant (power operator), and electricity supplier. To derive the market behaviors of these players, we formulate the market decision problems as a multistage Stackelberg game. By solving the game model, we obtain the optimal, with closed-form, wholesale investment and retail pricing strategy for the operator. We also obtain the energy supplier's best price mechanism numerically under certain assumption. We find the price of SSE being about 1.4 times higher than that of USE will benefit energy supplier optimally, under which power plant's optimal strategy of investing is to purchase USE about 4.5 times much more than SSE.