Centralized Volatility Reduction for Electricity Markets

TL;DR

This paper proposes an insurance market mechanism to reduce financial risks caused by increased electricity price volatility due to wind energy integration, supporting sustainable energy goals.

Contribution

It introduces a novel insurance market approach that can be integrated with existing wholesale markets to mitigate volatility impacts.

Findings

Theoretical guarantees for the proposed mechanism.

Analytical characterization over a simplified power system.

Numerical exploration on a modified IEEE 14-bus system.

Abstract

Increased penetration of wind energy will make electricity market prices more volatile. As a result, market participants will bear increased financial risks, which impact investment decisions and in turn, makes it harder to achieve sustainable energy goals. As a remedy, in this paper, we propose an insurance market that complements any wholesale market design. Our mechanism can be run by any suitable financial entity such as an independent system operator, with the aim of reducing the financial impacts of volatile prices. We provide theoretical guarantees, analytically characterize the outcomes over a copperplate power system example, and numerically explore the same for a modified IEEE 14-bus test system.