Risk- and Variance-Aware Pricing in Wholesale Electricity Markets
Abstract: This presentation will describe a method to internalize the variability (variance) of renewable generation resources in wholesale electricity pricing procedures. Using a rich body of literature on chance-constrained and distributionally robust optimization in the context of wholesale electricity markets, this presentation seeks to interpret this variability using VaR and CVaR risk measures, which are common in portfolio optimization tasks. Using these risk measures and conic duality theory, we derive and analyze energy and balancing reserve prices that internalize the risk of system limit violations and the variance of system state variables. Finally, we outline an approach to roll out risk-hedging financial instruments (e.g. Arrow-Debreu Securities) to enable risk trading in wholesale electricity markets.