Sloan Foundation grant looks at energy market structure for wind integration

February 26, 2019

UNIVERSITY PARK, Pa. — Chiara Lo Prete, assistant professor of energy economics in Penn State’s College of Earth and Mineral Sciences, was awarded a $250,000 grant for early career researchers from the Alfred P. Sloan Foundation to examine the effectiveness of energy market structures in aggregating private information on wind production forecasts to better coordinate commitment and production decisions in electric systems.

Restructured wholesale electricity markets in the United States have a two-settlement design with coordinated day-ahead and real-time auctions. The day-ahead market provides commitment and dispatch instructions to power generation units with lengthy startup and slow response times, while the real-time market is mainly intended to correct for energy imbalances due, for example, to relatively small errors in forecasting electricity demand.

Increasing shares of intermittent renewables, like wind, into the energy mix pose a challenge to this two-settlement structure because the real-time availability of renewable energy sources cannot be accurately predicted day ahead. The later the grid operators become aware of the need to modify day-ahead market schedules, the higher the costs associated with large forecast errors will be, due to greater inflexibility in power system operations closer to real time. In U.S. electricity markets, changes in schedule and commitment between the day-ahead and real-time market are centrally made by the grid operator based on its forecasts.

This project investigates whether efficiency in power system operations may be improved by adding intraday markets that incent consumers and producers to individually adjust their day-ahead schedules as soon as updated forecasts of system conditions become available.

“Several European countries already run intraday markets that clear between the day-ahead and real-time markets. However, it would be dangerous to assume that lessons from Europe will necessarily translate to the United States given the important structural differences between the two electricity market designs,” said Lo Prete. “Our results will provide insights into the most efficient path forward to better integrate and manage wind production uncertainty in wholesale electricity markets. While several approaches have been proposed to this end, our focus is on a potential market modification that may result in economic efficiency gains at much lower computational burden than other proposed solutions. Ongoing collaboration with PJM and ISO New England will enable dissemination of research findings to help inform stakeholder discussions about improvements in the design of energy markets in the United States.”

Other Penn State faculty working on the project are Uday V. Shanbhag, the Gary and Sheila Bello Chair and professor in the Harold and Inge Marcus Department of Industrial and Manufacturing Engineering, and Anthony Kwasnica, professor of risk management in the Smeal College of Business.

The team will integrate techniques from stochastic optimization and experimental economics. First, the researchers will develop unit commitment and dispatch models to simulate hourly operations decisions in an electric network under the two market designs. Simulation results will provide a benchmark for efficient market outcomes that would be observed if commitment and dispatch decisions were centrally made based on information available to individual market participants.

Second, the research team will design laboratory experiments to measure and compare performance characteristics of the two market designs. Predictions from the optimization models will be compared to outcomes from the experimental electricity markets to provide insights into real world market design. The experiments will be conducted in the Laboratory for Economic Management and Auction (LEMA), directed by Kwasnica.

“The laboratory is an ideal environment to evaluate market institutions under conditions that we can control, providing an opportunity to gather evidence on the relative strengths and weaknesses of a market institution and develop modifications at a relatively low cost before implementation in the field,” said Lo Prete.

Founded in 1934 by industrialist Alfred P. Sloan Jr., the foundation is a not-for-profit grant-making institution that supports high quality, impartial scientific research; fosters a robust, diverse scientific workforce; strengthens public understanding and engagement with science; and promotes the health of the institutions of scientific endeavor.

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Last Updated February 27, 2019