Abstract
We formulate and analyze a day-ahead (DA) electricity market in which a thermal power plant and a renewable generator compete with each other in their commitments to the market. The market price of energy is affected by the commitments of the generators. The renewable generator faces a settlement cost if it cannot meet its commitment due to unpredictable generation. As a hedge against this cost, it is equipped with a natural gas reserve that can either be used to compensate generation shortages or be sold in the natural gas market. We model the problem as a Stackelberg game, in which an independent system operator (ISO) sends a price signal to the generators. In response, the generators decide on their commitments to maximize their own profit. The ISO decides on the price such that the total commitment will be equal to the energy demanded by the (estimated) load. We develop sufficient conditions for the uniqueness of Nash equilibrium and obtain a quantitative solution for the Nash equilibrium. It is observed that the market price of energy is lower when the renewable generator is equipped with natural gas reserves. Furthermore, when the renewable generator is equipped with natural gas reserves, the commitments of the generators to the market are less affected by the variance of the renewable energy generation. It is also shown that a larger portion of the natural gas reserves are used for electricity generation when the renewable energy generation has higher uncertainty. Thus, the natural gas reserves act as an effective hedge against the variance in the generation of renewable energy.