Economic and environmental implications of different approaches to hedge against wind production uncertainty in two-settlement electricity markets: A PJM case study

This paper examines the economic and environmental outcomes of four two-settlement electricity market clearing designs. The first design corresponds to a Deterministic Market Clearing (DMC) similar to the mechanism currently used in organized wholesale electricity markets in the United States. The other three designs account for the day-ahead (DA) wind power production uncertainty into the DA market mechanisms either implicitly or explicitly. An Augmented Deterministic Market Clearing (ADMC) design introduces DA ramp-capability products. These products ensure adequate and ramp-feasible electricity generation capacity commitments in the DA stage to cope with the real-time realization of wind power generation. A Hybrid Deterministic Market clearing (HDMC) design augments ADMC by explicitly integrating a characterization of wind power production uncertainty into the residual unit commitment (RUC) process, which is run after the DA market is closed, using stochastic programming. The last design, referred to as stochastic market clearing (SMC), uses stochastic optimization to explicitly account for wind power production uncertainty in the DA market clearing mechanisms (i.e. DA unit commitment and economic dispatch). The four market clearing designs are assessed by simulating the electricity market operations of a test system and comparing their results in terms of operating costs, prices, costs and revenues of different types of producers, consumer's payments, integration of wind power, and air emissions. The test system has 12% of the capacity of PJM's fossil-fired power generation fleet, and uses data on coincident demand and wind power production from the Bonneville Power Administration (BPA) system during years 2010–2014. The simulations are performed hourly for a whole year. Results show that SMC is superior as its costs reductions are more than two times the improvements attained by ADMC and HDMC. Also, SMC results in electricity prices that are better aligned with operation costs, cuts the spread between the day-ahead and real-time prices by >40%, reduces out-of-market short-term revenue sufficiency payments by 58%, reduces CO 2 emissions by 3.52%, and decreases power plants’ cycling. HDMC is a distant second-best market design. Relative to DMC, it achieves a reduction in total costs that is less than half the reduction achieved by SMC, a reduction in out-of-market payments that is 80% of the reduction attained by SMC, and an increase in wind power integration that is <10% the improvement obtained under SMC.

Duke Scholars

Author Dalia Patino-Echeverri Environmental Sciences and Policy