Truthful Production Uncertainty in Electricity Markets: A Two-Stage Mechanism
This addresses inefficiencies in renewable-heavy power systems for market operators and producers, though it is incremental as it builds on existing VCG mechanisms.
The paper tackles the problem of production uncertainty from renewable sources in electricity markets, which increases system costs, by proposing a two-stage market clearing mechanism that elicits forecast distributions and reduces costs, as validated in a case study.
Renewable power sources have low marginal pro-duction costs, but may result in high balancing costs due to the inherent production uncertainty. Current day-ahead markets elicit only point production profiles and neglect the degree of uncertainty associated with each generating asset, preventing the market operator from accounting for balancing costs in day-ahead dispatch and ancillary service procurement. This increases total system costs and undermines market efficiency, especially in renewable-heavy power systems. To address this, we propose a new market clearing paradigm based on a two-stage mechanism, where producers report their production forecast distribution in the day-ahead stage, followed by the realized production in the real-time stage. By extending the Vickery-Clarke-Groves (VCG) payments to the two-stage setting, we show appealing properties in terms of incentive compatibility and individual rationality. An electricity market case study validates the theoretical claims, and illustrates the effectiveness of the proposed mechanism to reduce system costs.