Abstract
As the renewable penetration in the grid increases, the grid-takes-all-renewable paradigm will no longer be sustainable. We consider a day-ahead (DA) electricity market composed of a renewable generator, a natural gas power plant (NGPP) and a coal power plant (CPP). Each player provides the Independent System Operator (ISO) with their commitment and their asking price. The ISO schedules the generators using a least-cost strategy. Because of the intrinsic uncertainty of the renewable generation, the renewable player might be unable to meet its DA commitment. In the event of a shortfall, the renewable generator incurs a penalty so that the non-renewable sources are not forced to consume the cost of renewable intermittence. It has been recognized that such a penalty can lead to conservative bidding by the renewable generator, which may lead to lower than desired penetration of renewable energy in the grid. We formulate and analyze a contract between the renewable producer and the NGPP so that the NGPP reserves some amount of natural gas to hedge the renewable producer against shortfalls. Expressions for the optimal commitments of the players and for the optimal reserve contract are derived. When a reserve contract is established, we observe an increase both in the average profit of the players involved and in the renewable participation in the market. Thus, we show that a Pareto-optimal contract between market players can improve renewable penetration.