Energy procurement strategies in the presence of intermittent sources

The increasing penetration of intermittent, unpredictable renewable energy sources such as wind energy, poses significant challenges for utility companies trying to incorporate renewable energy in their portfolio. In this work, we study the problem of conventional energy procurement in the presence of intermittent renewable resources. We model the problem as a variant of the newsvendor problem, in which the presence of renewable resources induces supply side uncertainty, and in which conventional energy may be procured in three stages to balance supply and demand. We compute closed-form expressions for the optimal energy procurement strategy and study the impact of increasing renewable penetration, and of proposed changes to the structure of electricity markets. We explicitly characterize the impact of a growing renewable penetration on the procurement policy by considering a scaling regime that models the aggregation of unpredictable renewable sources. A key insight from our results is that there is a separation between the impact of the stochastic nature of this aggregation, and the impact of market structure and forecast accuracy. Additionally, we study the impact on procurement of two proposed changes to the market structure: the addition and the placement of an intermediate market. We show that addition of an intermediate market does not necessarily increase the efficiency of utilization of renewable sources. Further, we show that the optimal placement of the intermediate market is insensitive to the level of renewable penetration.