Pricing Energy in the Presence of Renewables

TL;DR

This paper develops a model to quantify how renewable energy sources impact electricity market prices, considering externalities and load variability, and shows that increased renewables can raise energy prices.

Contribution

It introduces an analytical framework for pricing energy in markets with renewables, incorporating load variance and externalities, which is a novel approach.

Findings

Higher renewable penetration can increase market clearing prices.

The model accounts for load variability using CVAR.

Externalities from renewables are quantifiable in market prices.

Abstract

At present, electricity markets largely ignore the fact that renewable power producers impose significant externalities on non-renewable energy producers. This is because consumers are generally guaranteed electricity within certain load parameters. The intermittent nature of production by renewable energy producers implies that they rely on non-renewable producers so that the aggregate power delivered meets the promised quality of service. This implicit insurance provided by the non-renewable power sector to consumers is not currently priced and leads to an often ignored, hidden monetary transfer from non-renewable producers to renewable producers. As the fraction of energy supplied by renewable resources increases, these externalities also increase. In this paper, we quantify these externalities by developing the market clearing price of energy in the presence of renewable energy. We consider a day-ahead electricity market where renewable and non-renewable generators bid by proposing their asking price per unit of energy to an independent system operator (ISO). The ISO's problem is a multi-stage stochastic optimization problem to dispatch energy from each generator to minimize the cost of purchased energy on behalf of the consumers. We incorporate the notion of load variance using the Conditional Value-at-Risk (CVAR) measure in the day-ahead electricity market to ensure that the generators are able to meet the load within a desired confidence level. We analytically derive the market clearing price of energy as a function of CVAR. It is shown that a higher penetration level of the renewable energies may increase the market clearing price of energy.