Single and Multisettlement Approaches to Market Clearing Under Demand Uncertainty

Abstract

Participants in electricity markets face a substantial amount of uncertainty, and with increased penetration of volatile renewable generation this uncertainty has further increased. Conventionally designed electricity markets cope with uncertainty by running two markets: a market that is cleared ahead of time, followed by a real-time balancing market to reconcile actual realizations of demand and available generation. In such mechanisms, the initial clearing process does not take into account the distribution of outcomes in the balancing market. Recently, an alternative so-called stochastic settlement market has been proposed (see, e.g., Pritchard et al. 2010 [Pritchard G, Zakeri G, Philpott A (2010) A single-settlement, energy-only electric power market for unpredictable and intermittent participants. Oper. Res. 58(4):1210–1219.] and Bouffard et al. 2005 [Bouffard F, Galiana FD, Conejo AJ (2005) Market-clearing with stochastic security—Part I: Formulation. IEEE Trans. Power Systems 20(4):1818–1826.]) where the ISO clears both stages in one single settlement market. While the effectiveness of the stochastic market clearing mechanism is clear when the market is competitive, this is open to question for imperfectly competitive markets. In this paper we consider simplified models for two types of market clearing mechanisms. First, a market clearing mechanism utilized in New Zealand, whereby firms offer in advance and are notified of a clearing quantity and price guide based on an estimate of demand, followed by real-time dispatch. We refer to this as NZTS. Secondly we consider a simplified stochastic programming market clearing mechanism. We compute Nash equilibria of games resulting from each of the market clearing mechanisms. We prove that under the assumption of symmetry, our simplified stochastic programming market clearing is equivalent to a two-period single settlement system that takes account of deviation penalties in the second stage. These, however, differ from NZTS. We show that when we assume symmetry, this stochastic settlement model results in better social welfare than does NZTS. We also investigate a number of asymmetric examples numerically. The e-companion is available at https://doi.org/10.1287/opre.2017.1610 .