Competition and Coalition Formation of Renewable Power Producers

TL;DR

This paper analyzes how renewable power producers form groups and strategize in electricity markets, balancing market power and uncertainty reduction, with implications validated using real market data.

Contribution

It characterizes the trade-off between market power and uncertainty in group formations of renewable producers, identifying optimal group sizes for maximizing output.

Findings

Large groups can reduce uncertainty but may exert market power.

Optimal group size balances uncertainty reduction and market power.

Results validated with PJM and NREL data.

Abstract

We investigate group formations and strategic behaviors of renewable power producers in electricity markets. These producers currently bid into the day-ahead market in a conservative fashion because of the real-time risk associated with not meeting their bid amount. It has been suggested in the literature that producers would bid less conservatively if they can form large groups to take advantages of spatial diversity to reduce the uncertainty in their aggregate output. We show that large groups of renewable producers would act strategically to lower the aggregate output because of market power. To maximize renewable power production, we characterize the trade-off between market power and generation uncertainty as a function of the size of the groups. We show there is a sweet spot in the sense that there exists groups that are large enough to achieve the uncertainty reduction of the grand coalition, but are small enough such that they have no significant market power.We consider both independent and correlated forecast errors under a fixed real-time penalty. We also consider a real-time market where both selling and buying of energy are allowed. We validate our claims using PJM and NREL data.