A Risk Aware Two-Stage Market Mechanism for Electricity with Renewable Generation

Over the last few decades, electricity markets around the world have adopted multi-settlement structures, allowing for balancing of supply and demand as more accurate forecast information becomes available. Given increasing uncertainty due to adoption of renewables, more recent market design work has focused on optimization of expectation of some quantity, e.g. social welfare. However, social planners and policy makers are often risk averse, so that such risk neutral formulations do not adequately reflect prevailing attitudes towards risk, nor explain the decisions that follow. Hence we incorporate the commonly used risk measure conditional value at risk (CVaR) into the central planning objective, and study how a two-stage market operates when the individual generators are risk neutral. Our primary result is to show existence (by construction) of a sequential competitive equilibrium (SCEq) in this risk-aware two-stage market. Given equilibrium prices, we design a market mechanism which achieves social cost minimization assuming that agents are non strategic.