Market Clearing Mechanisms under Uncertainty

Electricity markets face a substantial amount of uncertainty. While traditionally this uncertainty has been due to varying demand, with the integration of larger proportions of volatile renewable energy, added uncertainty from generation must also be faced. Conventional electricity market designs cope with uncertainty by running two markets: a market that is cleared ahead of time, followed by a real-time balancing market to reconcile actual realizations of demand and available generation. In such mechanisms, the initial clearing process does not take into account the distribution of outcomes in the balancing market. Recently an alternative so-called stochastic settlement market has been proposed (see e.g. Pritchard et al. (2010) and Bouffard et al. (2005)). In such a market, the ISO clears both stages in one single settlement market. In this paper we consider simplified models for two types of market clearing mechanisms. First a market clearing mechanism utilized in New Zealand, whereby firms offer in advance and are notified of a clearing quantity and price guide based on an estimate of demand. Then in real time firms are dispatched according to realized demand and prices are determined. We refer to this as NZTS. Secondly we consider a simplified stochastic programming market clearing mechanism. We demonstrate that under the assumption of symmetry, our simplified stochastic programming market clearing is equivalent to a two period single settlement (TS) system that takes count of deviation penalties in the second stage. These however differ from NZTS. We prove that this stochastic settlement models results in better social welfare than the NZTS under the assumption of symmetry. Our models are targeted towards analyzing imperfectly competitive markets. We will construct Nash equilibria of the resulting games for the introduced market clearing mechanisms and compare them under the assumptions of symmetry and in an asymmetric example.