Truthful Production Uncertainty in Electricity Markets: A Two-Stage Mechanism

TL;DR

This paper introduces a two-stage market mechanism for electricity markets that accounts for production uncertainty of renewable sources, improving efficiency and reducing costs.

Contribution

It proposes a novel two-stage market clearing paradigm with forecast distribution reporting and extends VCG payments to enhance incentive compatibility.

Findings

The mechanism incentivizes truthful reporting of production forecasts.

Case study shows reduced system costs with the new mechanism.

The approach maintains incentive compatibility and individual rationality.

Abstract

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.