Price formation and optimal trading in intraday electricity markets

Abstract

We develop a tractable equilibrium model for price formation in intraday electricity markets in the presence of intermittent renewable generation. Using stochastic control theory we identify the optimal strategies of agents with market impact and exhibit the Nash equilibrium in closed form for a finite number of agents as well as in the asymptotic framework of mean field games. Our model reproduces the empirical features of intraday market prices, such as increasing price volatility at the approach of the delivery date and the correlation between price and renewable infeed forecasts, and relates these features with market characteristics like liquidity, number of agents, and imbalance penalty.

Decision making with dynamic probabilistic forecasts

“…The full model specification for the temperature forecasts is thus given by equations (3-7) and (15)(16), while the full specification for the wind forecasts is given by equations (10)(11)(12)(13)(14) and (15)(16).…”

“…where σ m is a constant such that σ m = V 0 . Since empirical studies show a negative correlation between the market price and the wind production forecasts [20,13], we assume W, B t = λt, λ < 0, ∀t ∈ [0, T ].…”

“…The parameters of Model A are estimated as explained in Section 3.2, and for model B we fix m 0 to the same value as in Model A, and σ m ρ √ V 0 . The value of price volatility is calibrated as explained in [13]. The drift µ S , is not fixed for now, we will make it vary in the next paragraph for our study.…”

Equilibrium price in intraday electricity markets

“…These regulations are intented to reduce as much as possible asymmetry of information between players and yet, the intraday electricity prices still exhibit a pattern of increasing volatility. More recently Féron et. al.…”

“…al. (2020) [13] models an intraday market Nash equilibrium in the context of identical agents trading at a fundamental price plus a liquidity premium while the market price is defined à la Almgren and Chriss by a fundamental price plus a linear permanent impact induced by the average inventory level (because there is no market clearing condition, the average inventory is non-zero). In this context, they recover the Samuelson's effect as the result of strategic behaviour of agents.…”