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Wind energy is a rapidly growing source of renewable energy generation. However, the current extra-market approach to its assimilation into the electric grid will not scale at deep penetration levels. In this paper, we investigate how an independent wind power producer might optimally offer its variable power into a competitive electricity market for energy. Starting with a stochastic model for wind power production and a model for a perfectly competitive two-settlement market, we derive explicit formulae for optimal contract offerings and the corresponding optimal expected profit. As wind is an inherently variable source of energy, we explore the sensitivity of optimal expected profit to uncertainty in the underlying wind process. We also examine the role of forecast information and recourse markets in this setting. We quantify the role of reserves in increasing reliability of offered contracts and obtain analytical expressions for marginal profits resulting from investments in improved forecasting and local auxiliary generation. The formulae make explicit the relationship between price signals and the value of such firming strategies.
Date of Publication: Aug. 2012