Selling Random Energy

Global warming now poses one of the most serious challenges to the well-being of humanity at large. The projected increase in the Earth's mean surface and ocean temperatures will have a severe impact on human health in both the developed and developing regions of the world. As the burning of fossil fuels contributes significantly to worldwide greenhouse gas emissions, there has been a concerted policy reform effort in both the US and abroad to transform the electricity sector by increasing the displacement of conventional fossil fuel-based thermal generation with clean renewable generation such as wind and solar. California, for example, has set a target of 33% renewable energy penetration by the year 2020. Wind and solar energy will play a key role in realizing such aggressive targets. However, at these deep penetration levels, the inherent variability of wind and solar power production poses serious engineering and market challenges. These are due to the uncertainty, intermittency, and uncontrollability of wind and solar power. They are essentially random -- a stark contrast to conventional thermal power generation./nHow is variability in wind an solar power production dealt with today? Today, wind and solar energy are assimilated into the grid through legislative mandates, feed-in tariffs, lenient imbalance penalty pricing, guaranteed grid access, tax relief, and/or construction subsidies. Specifically, in California, the Participating Intermittent Renewable Program (PIRP) legislation compels the independent system operator (ISO) to accept all produced wind power subject to certain contractual constraints. This amounts to a system take-all-wind modus operandi in which wind power is treated as a negative load and the subsequent increase in the variability of net-load is absorbed by a portfolio of reserve generation capacity, whose cost is allocated amongst the load serving entities (LSE). Moreover, this socialisation of added reserve costs amongst the LSEs constitutes an implicit subsidy for variability costs to participating wind power producers. We submit to the reader that the current extra-market approach to renewable energy integration will become untenable as wind and solar energy penetration increases. Under this system-take-all-power regime, the attendant intermittency and limited forecastability of wind and solar power production will lead to a significant increase in the reserve generation requirements necessary to maintain system balance -- an unacceptable consequence. It is too expensive. Ergo, it will rapidly become infeasible to continue the implicit subsidization of the variability costs among the load serving entities. Moreover, it severely mitigates the net greenhouse gas benefit of renewable energy, as regulating reserves are normally supplied by fast-acting, fossil fuel based thermal generators such as natural gas turbines. The current strategy cannot scale. Clearly, strategies that mitigate the need for additional reserve requirements will be an essential means to supporting deep integration of variable renewable energy. Throughout this dissertation, we will focus explicitly on wind, however, much of the analysis is directly applicable to solar power generation as well./nHow will variability be dealt with tomorrow? In the near term, we argue that wind power producers will be forced to participate in conventional electricity markets alongside traditional dispatchable generation, where they will face ex-post financial penalties for deviations from contracts offered ex-ante in forward markets -- thus eliminating the implicit subsidy for variability costs. In response to the financial risk emanating from uncertainty in wind power production, a rational wind power producer will be forced to curtail its projected output, thus decreasing the amount of variability that has to be compensated for with reserve generation by the system operator. However, such a removal of the implicit subsidy for variability cost may result in significant profit loss to the wind power producer. Consequently, it will become necessary for the wind power producer to develop and evaluate strategies that aid in the mitigation of wind power output variability. In this dissertation, we quantify, within the setting of a perfectly competitive market, the maximal expected profit achievable by a wind power producer through optimal bidding. Moreover, as wind is an inherently variable source of energy, we explore the sensitivity of optimal expected profit to uncertainty in the underlying wind process and quantify the marginal economic value of various firming mechanisms that aid in the mitigation of power output variability. Specifically, we appraise the benefit of improved forecasting and quantify the added value of recourse opportunities afforded by the co-location of an energy storage system and/or fast-acting thermal generation with the wind power producer. Further, we explore the extent to which a group of N independent wind power producers can exploit the statistical benefits of aggregation and risk sharing by forming a willing coalition to pool their variable power to jointly offer the aggregate output as single entity into a forward energy market.

Advisor: Poolla, Kameshwar