A newsvendor approach to energy imbalance mechanism in a day ahead electricity market

Abstract

We study an energy imbalance problem in a day ahead electricity market from the perspective of a distribution company. This company commits to buy a certain amount of electricity in the day ahead market the day before the actual demand of its customers is realized and faces energy imbalance due to demand uncertainty. This energy imbalance of the distribution company is penalized by a mechanism which includes penalty parameters de ned by energy market regulatory authorities. By developing a variant of the newsvendor model, we nd the optimal commitment amount of the distribution company and analyze the e ect of penalty parameters on this amount. We show that the way that penalty parameters are selected in current practice may lead the distribution company to underbid. With an empirical analysis performed on real data, we also show that e ect of these penalty parameters could di er hourly, daily, seasonally, regionally and according to sectoral demand pro les. Considering that the traditional policy used to decide on the penalty parameters does not have a systematic approach, in this paper, we present insights for distribution companies on the optimal commitment decision as well as for the energy market regulatory authorities on how to choose the penalty parameters. Keywords: