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At present, electricity markets largely ignore the fact that renewable powerproducers impose significant externalities on non-renewable energy producers.This is because consumers are generally guaranteed electricity within certainload parameters. The intermittent nature of production by renewable energyproducers implies that they rely on non-renewable producers so that theaggregate power delivered meets the promised quality of service. This implicitinsurance provided by the non-renewable power sector to consumers is notcurrently priced and leads to an often ignored, hidden monetary transfer fromnon-renewable producers to renewable producers. As the fraction of energysupplied by renewable resources increases, these externalities also increase.In this paper, we quantify these externalities by developing the marketclearing price of energy in the presence of renewable energy. We consider aday-ahead electricity market where renewable and non-renewable generators bidby proposing their asking price per unit of energy to an independent systemoperator (ISO). The ISO's problem is a multi-stage stochastic optimizationproblem to dispatch energy from each generator to minimize the cost ofpurchased energy on behalf of the consumers. We incorporate the notion of loadvariance using the Conditional Value-at-Risk (CVAR) measure in the day-aheadelectricity market to ensure that the generators are able to meet the loadwithin a desired confidence level. We analytically derive the market clearingprice of energy as a function of CVAR. It is shown that a higher penetrationlevel of the renewable energies may increase the market clearing price ofenergy.

Pricing Energy in the Presence of Renewables