Endogenous error pricing for energy imbalance settlements

This paper models the bidding behavior of energy market participants under an endogenous imbalance pricing mechanism. Wind producers are increasingly required to settle their day-ahead electricity bids based on their actual production in real-time, which impacts their bidding behavior and curtailment decisions. The real-time price that players pay or receive in order to settle their deviations is based on the realized forecast errors in wind and demand, so it is affected by the strategies of all wind producers in the market. We formulate a two-stage game where players place ex-ante bids for energy production and then may curtail their realized output in real-time. Then, we find the subgame perfect equilibrium strategy for producer bidding and curtailment. Profit-maximizing bids are equal to the expected value of players' post-curtailment production values. The results show that the endogenous pricing mechanism leads to better tradeoffs of system efficiency and risk compared to the case where penalties are exogenous.