A Two Stage Stochastic Mechanism for Selling Random Power

We present a two stage auction mechanism that renewable generators (or aggregators) could use to allocate renewable energy among load serving entities (LSEs). The auction is conducted day-ahead. LSEs submit bids specifying their valuation per unit, as well as their real-time fulfillment costs in case of shortfall in generation. We present an allocation rule and a de-allocation rule that maximizes expected social welfare. Since the LSEs are strategic and may not report their private valuations and costs truthfully, we design a two-part payment, one made in Stage 1, before renewable energy generation level W is realized, and another determined later to be paid as compensation to those LSEs that have to be “de-allocated” in case of a shortfall. We propose a two-stage Stochastic VCG mechanism which we prove is incentive compatible in expectation (expected payoff maximizing bidders will bid truthfully), individually rational in expectation (expected payoff of all participants is non-negative) and is also efficient. To the best of our knowledge, this is the first such two-stage mechanism for selling random goods.