Backup capacity coordination with renewable energy certificates in a regional electricity market

ABSTRACT

This article studies a coordination mechanism between a renewable energy supplier and a conventional supplier in a regional electricity market. The intermittent nature of the renewable supplier results in random power shortages. Though the renewable supplier can buy backup power from a conventional supplier who prepares backup capacity to cover the shortage, there is no commitment that enough backup capacity will be prepared without any incentives to the conventional supplier. We design a coordination mechanism where the renewable supplier offers the conventional supplier Renewable Energy Certificates (RECs) proportional to the backup capacity committed. We prove that this mechanism coordinates the conventional supplier’s decision on backup capacity and can arbitrarily split the system profit between the two suppliers. Our analytical results show that when the shortage cost increases, the backup capacity increases, the REC offering rate increases, the total profit decreases, and the renewable supplier’s profit decreases but the conventional supplier’s profit increases. We also show analytically that the social welfare under this mechanism is higher than in the decentralized case unless the regional environment is extremely sensitive to conventional power’s carbon footprint, and the benefit of buffering power shortage cannot compensate for the damage to the environment.

KEYWORDS:

• Renewable portfolio standard
• renewable energy certificate
• regional electricity market
• game theory
• coordination contract

Funding

This research is supported by the Division of Civil, Mechanical and Manufacturing Innovation (Award Number: 1662589) and the Division of Electrical, Communications and Cyber Systems (Award Number: 1610935) of the National Science Foundation to study how to enhance power system resilience and stability facing renewable energy penetration.

Notes

1 http://www.wartsila.com/en/gas-power-plant-to-south-texas-electric-cooperative

Additional information

Notes on contributors

Yingjue Zhou

Yingjue Zhou is currently a data scientist at the Sears Holdings Corporation. He received his B.S. degree in electrical engineering from Xi’an Jiaotong University, China; his M.S. degree in control engineering and control theory from the Automation Institute of Metallurgical Industry, China; and his Ph.D. degree in industrial engineering and management from Oklahoma State University. Before joining Sears Holdings, he had 3 years of working experience in the power industry and another 3 years of working experience in the logistics industry. His research interests include operation management in energy, manufacturing, and retail areas.

Tieming Liu

Tieming Liu is an Associate Professor at the School of Industrial Engineering and Management, Oklahoma State University. He received his Ph.D. degree in transportation and logistics from MIT in 2005, his M.S. degree in industrial engineering and management science from Northwestern University in 2001, and his M.S. and B.S. degrees in control theory and control engineering from Tsinghua University in 2000 and 1997, respectively. His research interests include supply chain management, coordination mechanism design, renewable energy planning, and healthcare analytics.

Chaoyue Zhao

Chaoyue Zhao is the Jim and Lynne Williams Assistant Professor in industrial engineering and management at Oklahoma State University, Stillwater, Oklahoma. She received her B.S. degree in information and computing sciences from the School of Mathematics, Fudan University, China, in 2010 and her Ph.D. degree in industrial and systems engineering from the University of Florida, Gainsville, in 2014. She also worked at Pacific Gas and Electric Company in 2013. Her research interests include data-driven stochastic optimization with applications in power grid security and renewable energy management.