Energy Market Design for Renewable Resources: Imbalance Settlements and Efficiency–Robustness Tradeoffs

This paper examines optimal energy market bidding behavior for stochastic resources when energy imbalance payments are determined endogenously from market clearing conditions. Some electricity markets require wind producers to settle day-ahead offers based on their real-time energy production. This is usually justified by economic and cost-causation principles, without considering the effects of these policies on curtailment and system balancing costs. Under these real-time settlement requirements, demand and wind forecast errors impact the effective penalty price, so strategic behavior affects the penalty price paid by producers. This paper formulates a two-stage game where producers place energy bids in the day-ahead market and then choose a curtailment level in real-time, and it derives the symmetric subgame perfect equilibrium strategy for producers. It details how supply curve convexity and resource correlation can lead wind producers to bid conservatively even when they are not risk averse. The results show that market-based pricing mechanisms improve tradeoffs between system efficiency and mean squared bid error as compared to the case where penalty levels are determined by alternative policies, suggesting additional benefits of market-based penalty prices beyond those previously studied.