Strategic bidding of wind power producers in electricity markets in presence of information sharing

Michiel Kenis, Hanspeter Höschle and Kenneth Bruninx

Energy Economics, 2022, vol. 110, issue C

Abstract: In order to facilitate the growing share of Renewable Energy Sources (RES) in power systems around the world, a cost-effective integration of RES into the electricity market is essential. In addition to numerous technical challenges, the integration of RES-based generation creates some market design challenges. For example, monitoring market power abuse by RES-based electricity generation companies may be not straightforward, given the variable and limitedly predictable availability of these resources, not known by the regulator. In this context, this paper investigates the impact of sharing wind power forecasts among market participants on wind power producers’ (WPPs’) bidding behaviour. An analytical model that captures the strategic price-making behaviour of competing WPPs on the day-ahead electricity market is provided. A best response function is provided, showing the strategic quantity bid of a price-making WPP in function of the bids of other market participants. Subsequently, a ‘multiple leaders-common market clearing’ problem is formulated as a Nash game between the strategic WPPs. Last, we allow WPPs to make their individual wind power forecasts available to their competing WPPs. When all price-making market participants possess the forecasts of each WPP, all strategic agents estimate the market outcome correctly. On the contrary, with minimal information sharing, the price-making WPPs use an assumption on the behaviour of the other WPPs in the strategic determination of their quantity bids. Sharing information on individual forecasts may lead to a higher or lower wind power participation into the day-ahead market, profits for WPPs and social welfare. On the one hand, systems in which all the WPPs would bid above their mean forecast lead to a lower wind power participation when sharing individual forecasts among WPPs, hence, a lower social welfare. Additionally, the profits for WPPs increase. On the other hand, a higher wind power participation is realised when sharing forecasts for systems in which all WPPs bid below their mean forecast, hence a higher social welfare and lower WPP profits. These insights are useful for policy makers and regulators in order to ensure transparent and competitive electricity markets.

Keywords: Power markets; Wind energy; Forecast uncertainty; Wind forecasting; Information sharing (search for similar items in EconPapers)
JEL-codes: I30 P18 Q41 Q42 Q47 Q48 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:110:y:2022:i:c:s0140988322002055

DOI: 10.1016/j.eneco.2022.106036

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