554 IEEE TRANSACTIONS ON POWER SYSTEMS, VOL. 25, NO.

1, FEBRUARY 2010

Short-Term Trading for a Wind Power Producer

Juan M. Morales, Student Member, IEEE, Antonio J. Conejo, Fellow, IEEE, and Juan Pérez-Ruiz, Member, IEEE

Abstract—This paper presents a technique to derive the best of- Excess of energy (positive deviation)
fering strategy for a wind power producer in an electricity market incurred by the wind producer with respect
that includes various trading floors. Uncertainty pertaining to
to the schedule in time period and scenario
wind availability, market prices at the different trading stages,
and balancing energy needs are properly taken into account. Risk (in MWh).
on profit variability is suitably controlled at the cost of a small Deficit of energy (negative deviation)
reduction in expected profit. The proposed technique translates incurred by the wind producer with respect
into a linear programming problem of moderate size, which is
to the schedule in time period and scenario
readily solvable using commercially available software. A variety
of numerical case studies demonstrate the interest and effective- (in MWh).
ness of the proposed technique. Appropriate conclusions are duly Auxiliary variable used to compute the
drawn. conditional value at risk, CVaR [in ].
Index Terms—Optimal offering, risk, stochastic programming, Auxiliary variable in scenario used to
wind power. compute the CVaR [in ].

NOTATION C. Random variables

The main notation used throughout the paper is stated next
for quick reference. Other symbols are defined as required.
A. Indices and numbers
Index of time periods running from 1 to
Index of scenarios running from 1 to
B. Continuous variables
Power offered by the wind producer in
the day-ahead market for time period
(in MW).
Power offered by the wind producer in the
adjustment market for time period and
scenario (in MW).
Power production scheduled for the wind
producer in time period and scenario
(in MW).
Total deviation of energy incurred by
the wind producer with respect to the
schedule in time period and scenario
(in MWh).
Adjustment market price in time period
(in /MWh).
Day-ahead market price in time period (in
/MWh).
. Price for upward energy resulting from
. the balancing market in time period (in
/MWh).
Price for downward energy resulting from
the balancing market in time period (in
/MWh).
Price of positive imbalances incurred in
time period (in /MWh).
Price of negative imbalances incurred in
time period (in /MWh).
Wind power production in time period (in
MW).
Ratio between positive imbalance price and
day-ahead market price in time period .
Ratio between negative imbalance price
and day-ahead market price in time
period .

These variables, if augmented with the subscript , represent

Manuscript received December 04, 2008; revised July 16, 2009. First pub- their realization in scenario .
lished January 08, 2010; current version published January 20, 2010. The work
of J. M. Morales and A. J. Conejo was supported in part by the Junta de Co-
munidades de Castilla-La Mancha through Project PCI-08-0102 and in part D. Constants
by the Ministry of Science and Technology of Spain through CICYT Project Duration of time period (in hours).
DPI2006-08001. Paper no. TPWRS-00893-2008.
J. M. Morales and A. J. Conejo are with the University of Castilla-La Installed capacity of the wind farm (in
Mancha, 13071 Ciudad Real, Spain (e-mail: juanmiguel.morales@uclm.es;
antonio.conejo@uclm.es).
MW).
J. Pérez-Ruiz is with the University of Málaga, 29071 Málaga, Spain (e-mail: Per unit confidence level.
jperez@uma.es).
Digital Object Identifier 10.1109/TPWRS.2009.2036810
Probability of occurrence of scenario .

0885-8950/$26.00 © 2010 IEEE

MORALES et al.: SHORT-TERM TRADING FOR A WIND POWER PRODUCER
I. INTRODUCTION
A. Motivation
HE integration of wind power is increasing rapidly in
T many electric energy systems throughout the world
[1]–[4]. Two main driving forces motivate this raise: the in-
creasing price of fossil fuels (natural gas, oil, and coal) as less
and less reserves are available and the need to curtail carbon
emissions to preserve a functioning atmosphere.
As the wind power technology matures and reaches break-
even costs, subsidies turn out to be less and less relevant, and
wind producers become interested in participating in electricity
markets to maximize their profits. This is particularly the case
for producers owning wind farms at different network locations,
which have the possibility of combining their wind production
resources and offering power generation portfolios to partici-
pate in different short-term trading floors within a fully fledged
electricity market.
However, wind power is undispatchable and plagued by the
major uncertainty that constitutes wind availability. Thus, the
market strategy of a wind producer must hedge against this un-
certainty to be profit effective and to dampen the profit vari-
ability due to very significant wind fluctuation. In addition to un-
certainty on wind availability, the wind producer must also cope
with uncertain market prices. In this context, due to the nondis-
patchable nature of wind power production, no risk-hedging in-
strument (e.g., a forward contract) is available for wind pro-
ducers other than modifying their offers in short-term markets.
The pernicious effect of production uncertainty is eliminated
by a balancing mechanism that allows covering the lack of pro-
duction of uncertain sources, such as wind power. The balancing
mechanism is provided by energy sources that are generally ex-
pensive but dispatchable, such as combine cycle gas turbines.
As a wind producer needs to rely more and more on the bal-
ancing mechanism, its profitability deteriorates quickly. Thus,
a key concern of a wind producer should be to reduce its need
for balancing energy.
B. Approach
The uncertainty sources faced by a wind producer are specif-
ically four: 1) wind availability; 2) the hourly price of the day-
ahead market; 3) the hourly price of adjustment markets within
one day (one or several of these markets can be considered);
and 4) the hourly price of the balancing energy resulting from
the balancing mechanism.
We consider a fully fledged multimarket trading floor in-
cluding the day-ahead market, a single adjustment market
(sufficiently liquid and closing just prior to actual opera-
tion), and a real-time energy balancing mechanism. Also,
the production mix is assumed to be compatible with such a
market structure, i.e., the wind penetration allows the proper
functioning of the day-ahead and adjustment markets. Within
this market framework, we develop a multistage stochastic
programming model (see [5] or [6]) that embodies risk control
on profit variability and provides optimal offering curves for
the day-ahead market. The offering strategy is derived for the
day-ahead market, but analogous offering strategies can be
derived for the adjustment markets in a straightforward manner.
555
For the risk-neutral case, we provide the value of the stochastic
solution (VSS) and the expected value of perfect information
(EVPI). In addition, we illustrate the gains associated with risk
control in terms of profit stability for a very moderate reduction
in expected profit. The VSS is a metric that allows assessing
the effectiveness of a stochastic programming approach (see
[5] or [7]). It is defined as the difference between the expected
profit of the stochastic model and the expected profit obtained
from the problem, where the decisions variables are fixed to
those resulting from the associated deterministic problem, i.e.,
the problem in which stochastic variables are replaced by their
respective expected values. On the other hand, the EVPI is an
index measuring how much the wind producer would be willing
to pay to know the future realizations of the stochastic processes
under consideration (market prices and wind availability). It is
calculated as the difference between the expected profit resulting
from the problem, where the decisions to be made anticipate the
subsequent outcomes of the random variables and the expected
profit of the stochastic model (see [5]). Specifically, we compute
this metric by assuming perfect information on each stochastic
process separately in order to quantify the relative importance
of each source of uncertainty that is considered.
C. Literature Review
To deal with the financial losses stemmed from the variability
and uncertainty of wind power, three main approaches have been
proposed in the literature. One of them is based on the combined
and coordinated use of wind power and energy storage technolo-
gies (pumped-storage facilities, compressed air facilities, etc.)
[8]–[11]. Another relevant approach is presented in [12], where
financial options are introduced as a tool for wind producers to
hedge against wind generation uncertainty. The third approach
focuses on designing stochastic models intended to produce op-
timal offering strategies for a wind producer participating in an
electricity market on its own [13]–[15].
The research presented in this paper follows this last approach
and, in particular, introduces significant advances in the line
of research initiated in [15], where stochastic programming is
used to generate optimal offers for trading wind generation in
short-term energy markets. These advances have to do with im-
provements in the mathematical formulation of the problem, the
consideration of risk management, and the analysis of the ben-
efits of including an adjustment market within the market struc-
ture from a wind producer perspective.
D. Contributions
The contributions of this paper are fourfold:
1) to provide a tool to derive hourly offering strategies
(curves) for a wind producer operating within an elec-
tricity market involving various trading floors and a
balancing mechanism;
2) to express the tool in 1) as a linear programming problem,
which can be efficiently solved using commercially avail-
able solvers;
3) to provide an effective way to limit the risk of the profit
variability of the wind producer at the cost of a small re-
duction in its expected profit;
4) to analyze and discuss in detail a realistic case study.
556
II. PROBLEM DESCRIPTION
A. Market Framework
Consider a wind power producer participating in a pool-based
electricity market that includes three independent and succes-
sive short-term trading floors: the day-ahead market, the adjust-
ment market, and the balancing market. We consider that the
wind producer has no market power capability in either of the
aforementioned markets, and that its objective is to maximize
its expected profits from trading energy in the day-ahead and
adjustment markets and minimize the imbalance cost incurred
in the balancing market.
Each one of the three markets is cleared through a single
auction process. The time framework for market clearing is as
follows. The day-ahead market concerning the whole day d is
cleared at 10 A.M. of day . Because of the significant delay
between the closure of this market and the beginning of the en-
ergy delivery period (14 h), the electricity pool includes an ad-
justment market, where it is possible to take corrective actions.
These actions are intended to reduce or eliminate the differences
between the expected production and the schedule cleared in the
day-ahead market. This adjustment market is of especial rele-
vance for wind producers, as it allows them to incorporate into
their offers the certainty gained during the time interval between
the closure of both markets by updating their generation fore-
casts, thus reducing the associated uncertainty. In this paper,
we consider that the adjustment market is cleared very close
to the delivery horizon (e.g., one hour or half an hour before).
It should be noted that additional adjustments markets can be
considered. Finally, the balancing market ensures the real-time
balance between generation and demand by offsetting the differ-
ences between the real-time operation and the last energy pro-
gram cleared in the markets. For this reason, this market remains
open until 15 min before the delivery hour. Therefore, through
this last market, energy imbalances are corrected and priced ac-
cording to the settlement mechanism for imbalance prices ex-
plained below. The electricity market of the Iberian Peninsula
motivates this modeling framework [16].
B. Mechanism for Imbalance Prices
Imbalance prices result from the system balancing market, in
which the price of the energy replacing the deviation is deter-
mined.
In the wholesale electricity market of the Iberian Peninsula,
like in the rest of European electricity markets, a price for the
positive energy deviation (higher production or lower consump-
tion than scheduled) and a price for the negative energy devia-
tion (lower production or higher consumption than scheduled)
are settled for each time period. These prices represent the cost
of the energy required to counteract the unplanned deviations,
and consequently, they depend on the sign of the imbalance as
a whole (system imbalance). Specifically, the following.
1) If the system imbalance is positive (excess of generation),
then
(1)
(2)
IEEE TRANSACTIONS ON POWER SYSTEMS, VOL. 25, NO. 1, FEBRUARY 2010
In order to palliate the excess of generation in the system,
the operator uses the balancing market where producers
submit offers to repurchase the energy previously sold
in the day-ahead market. Assuming a rational behavior,
producers are only willing to repurchase the excess of
energy at a price smaller than the day-ahead
market-clearing price . Thus, those market par-
ticipants causing the positive system imbalance are
remunerated for their overproduction at . As a result,
they obtain a profit smaller than the profit they would
have achieved if they had sold their overproduction in the
day-ahead market. On the contrary, those market partici-
pants producing less energy than that resulting from the
day-ahead market, and consequently helping to alleviate
the positive system imbalance are just paid at for their
actual production, and so they do not incur imbalance cost.
2) If the system imbalance is negative (deficit of generation),
then
(3)
(4)
In this case, the operator organizes a balancing market to
which producers submit additional selling offers. Again,
assuming a rational behavior, producers are willing to
produce the amount of energy required to cover the deficit
of generation at a price higher than the day-ahead
market-clearing price . The cost of this transaction
falls on those market participants responsible for the
system imbalance. In this sense, note that, as the price of
this additional energy is higher than the actual price of
the energy traded in the day-ahead market, the balancing
process implies a profit loss for these market participants
with respect to the profit they would have obtained by
selling only their actual production in the day-ahead
market. On the other hand, those market participants
producing more than agreed on the day-ahead market, and
consequently contributing to mitigate the negative system
imbalance are paid at for their overproduction, and
hence they do not incur imbalance cost.
From the above discussion, it follows that and
.
It is important to emphasize that according to these criteria,
those participants who offset the system imbalance, i.e., those
participants who contribute to restore the system balance, are
not penalized, which is a rational and reasonable assumption.
C. Wind Producer Revenues
Consider a wind power producer that offers and gets accepted
a level of energy into the day-ahead market for time period
, but actually generates . For the sake of simplicity, no ad-
justment market is considered in this exposition. The revenue
of this wind power producer for period is
(5)
where is the imbalance income resulting from the balancing
process and may be negative, i.e., it may represent a cost. The
total deviation incurred by the wind producer is defined as
(6)
MORALES et al.: SHORT-TERM TRADING FOR A WIND POWER PRODUCER
and consequently, is given by
(7)
. of adjustment and balancing prices, and of wind power
According to expression (6), a positive deviation means produc-
tion surplus and a negative deviation represents a deficit of pro-
duction. Therefore, is the price at which the wind pro-
ducer will be paid (charged) for its excess (deficit) of generation.
Lastly, if we define
(8)
(9)
then
(10)
.
Note that definitions (8) and (9) are valid under the assump-
tion that the hourly electricity prices in the day-ahead market
are positive, i.e., . This is consistent with the price be-
havior in most electricity markets, and particularly, with the one
in the Iberian Peninsula, which motivates this study. Ratios
and would need to be redefined for other market structures
where zero prices in the day-ahead market do frequently occur.
D. Stochastic Programming Approach
The wind producer problem described above is subject to four
sources of uncertainty, namely the day-ahead market price, the
adjustment market price, the wind power generation, and the
price for imbalance. Among these sources of uncertainty, the
one associated with the wind power production constitutes the
keystone of the decision-making process. Given that the wind
production is characterized by zero generation cost, its unpre-
dictable nature is directly responsible for the likely loss of gains
incurred by the wind power producer through the imbalance
cost.
In order to account for the impact of these sources of un-
certainty on the wind producer offer, we propose to charac-
terize them as stochastic processes and solve the wind producer
problem stated above by using a multistage stochastic program-
ming approach, wherein each stage represents a market. The se-
quence of stages and decisions is as follows.
1) Design the offer strategy for the day-ahead market and
submit the resulting energy selling offers to this market for
each period of the market horizon. In this stage, decisions
are made based on plausible realizations of the stochastic
processes involved, namely, market prices (day ahead, ad-
justment, and balancing) and wind power production.
2) Once the day-ahead market price is known for each time
period, decide the amount of energy to sell/buy in/from the
adjustment market. Specifically, at the moment that this
decision is made, the 24-hourly day-ahead market prices
and the wind power generated in the time periods between
the closures of the day-ahead and adjustment markets are
known. On the contrary, the adjustment and balancing
market prices, and the wind power production for the rest
557
of the market horizon are still uncertain. Therefore, in this
second stage, and for every day-ahead market price real-
ization, decisions are made based on plausible scenarios
production. Note that the wind production scenarios, span-
ning the whole market horizon and available at this second
stage, are generated knowing the actual wind production
in the periods between the closures of the day-ahead and
adjustment markets.
3) The last stage of the stochastic programming approach is
determined by the materialization of both the imbalance
prices and the wind power generated in the time periods
spanning the whole market horizon. Thus, the deviation
incurred by the wind power producer in each one of these
periods is known and the consequent cost for imbalance
can be computed.
E. Uncertainty Characterization
Seasonal autoregressive integrated moving average
(ARIMA) models [17] have been used to characterize the
following.
1) The price series in the day-ahead market.
2) The difference between the price series in the adjustment
market and the price series in the day-ahead market;
working on this difference allows preserving the strong
correlation between both price series.
3) The series defined as:
. Note that the ratio series and can be directly
derived from by applying the rules (1)–(4) governing the
mechanism for imbalance prices described in Section II-B.
In particular, it holds that, if , then , and
vice versa. In addition, note that series can be linearly
expressed as . Fig. 1 illustrates a graphical
explanation of the modeling of imbalance price ratios.
To generate price (day-ahead, adjustment, and balancing)
scenarios, we use seasonal ARIMA models because these
models provide appropriate accuracy for moderate effort.
Moreover, they are simple to derive and fit.
To characterize the wind speed uncertainty, the following
second-order autoregressive model is used:
(11)
where represents the wind speed in time period , is white
noise, and , , and are parameters estimated from histor-
ical data. Autoregressive models have been proved to perform
well for short time horizons. Giebel et al. [18] provide a good
summary of the state of the art in models for short-term predic-
tion of wind power.
Once the wind speed scenarios are generated, they are trans-
formed into power scenarios through the power curve associated
to each turbine model installed in the wind farm. Then, under the
assumption that the characteristics of the wind are the same all
over the plant at each instant, scenarios representing the power
output of the wind farm can be obtained by just aggregating the
production of each available turbine in the plant. Note that it
is not the purpose of this paper to develop an accurate charac-
terization of the wind speed uncertainty, neither to illustrate a
558
Fig. 1. Graphical representation complementing the explanation of the modeling of imbalance price ratios.
rigorous procedure to convert wind speed scenarios into wind
power scenarios for a specific wind plant.
The aforementioned stochastic models can be used to gen-
erate price-wind power scenarios using a tree format. Note that
this paper does not focus on scenario generation, and thus, we
do not deal with likely correlations among market prices (day
ahead, adjustment, and balancing) and wind production. The
study of such correlations constitutes a subject that is outside
the scope of this paper, requires further research, and affects
solely the building of the scenario tree. Thus, the uncertainty
characterizing the wind producer problem is modeled through a
symmetric scenario tree that is specifically built as follows.
1) Generate price scenarios for the day-ahead market.
2) For each realization of the day-ahead market prices, simu-
late price scenarios for the adjustment market.
3) For each scenario of the adjustment market prices, generate
wind power realizations.
4) Finally, for each wind power realization, simulate im-
balance price ratio scenarios.
Hence, the total number of scenarios composing the tree is
. (14)
An appropriate modeling of the uncertainty characterizing
the wind producer problem should include the knowledge on
the wind generation stochastic process gained during the time
interval between the closure of the day-ahead and adjustment
markets. This gain of certainty is due to the fact that the en-
ergy selling/buying offer to submit in the adjustment market
can be decided taking into account the realized values of the
wind generation stochastic process for the time periods after the
day-ahead market clearing. In order to reflect this circumstance
within the scenario tree, we propose to generate wind speed
scenarios as follows.
1) Simulate wind speed scenarios for the periods making
up the time interval between the closure of the day-ahead
and adjustment markets.
2) For each one of the wind speed scenarios generated in the
previous step, simulate wind speed scenarios for the
time interval spanning from the closure of the adjustment
market and the end of the market horizon.
It should be noted that each one of the wind speed scenarios
generated in step 1 constitutes a series of past wind speed re-
IEEE TRANSACTIONS ON POWER SYSTEMS, VOL. 25, NO. 1, FEBRUARY 2010
alizations from which the corresponding wind speed sce-
narios are simulated according to model (11). Finally, also note
that .
For the sake of problem tractability, a fast-forward reduction
algorithm as described in [19] is used in this paper to reduce the
number of scenarios while still retaining the essential features
of the original scenario tree.
III. MATHEMATICAL FORMULATION
A. Basic Model
The optimization problem to maximize the expected profit of
a wind power producer trading just in the day-ahead market can
be formulated as follows:
(12)
(13)
(15)
Note that, assuming zero generation cost for the wind pro-
duction units, the expected profit, i.e., the objective function
(12), equals the expected revenue of the wind power producer.
Equation (13) constitutes the definition, per period and scenario,
of the imbalance income function. Constraints (14) limit the
amount of power that can be sold in the day-ahead market, and
(15) defines the total deviation incurred by the wind producer in
each period and scenario.
In order to model the imbalance income function , a
binary variable is used in [15] for each time period and
each scenario . The resulting model is then formulated as a
mixed-integer nonlinear programming problem. In this paper,
an equivalent linear programming formulation is proposed
with the consequent gain in robustness, simplicity, and com-
putational efficiency. This linear formulation is presented next
[(16)–(21)] and is based on decomposing the energy imbalance
into the sum of a positive and a negative imbalances,
and , respectively [see (19)]. Moreover, by means of this
MORALES et al.: SHORT-TERM TRADING FOR A WIND POWER PRODUCER 559

decomposition, no binary variables are required due to the
nature of the optimization problem tending to minimize the im-
balance cost. In other words, for a given total energy deviation
, the optimal solution is guaranteed to be
achieved with one of the variables or equal to zero
due to the fact that and . Constraints (20) and
(21) below impose caps on the positive and negative deviations,
respectively. The linear formulation is
C. Incorporating Risk Control
The risk measure used in this study is the conditional value
at risk at the confidence level ( -CVaR), because this metric
can be expressed linearly within an optimization problem and
exhibits good mathematical properties [22]. If maximizing a dis-
crete profit distribution, -CVaR can be defined approximately
as the expected profit of the scenarios with lowest
profit.
The risk-constrained formulation of the problem faced by the
wind producer is summarized as

(16) (24)

subject to constraints (17)–(23) plus the following ones required

for the linear formulation of the CVaR:
(17)
(18)
(19)
(20) (25)
(21) (26)

The objective function (24) to be maximized includes the ex-

Model (16)–(21) can be solved by decomposition into op-
timization problems, one for each time period , because it does
not contain any constraint or any decision variable coupling dif-
ferent time periods.
B. Offer Curves
The mathematical model presented before is intended to ob-
tain the optimal quantities (in a stochastic programming sense)
to be sold in the day-ahead market (e.g., 20 MWh in hour 1, 65
MWh in hour 2, etc.). However, it may be convenient to derive
optimal bidding curves for every hour of the day-ahead market.
For this purpose, variables representing the power traded
in this market for each time period are made dependant on
scenarios , as in [20] or [21], and the following
constraints are added to model (16)–(21):
pected profit of the wind producer [ in (16)] and the CVaR
of the profit multiplied by the weighting parameter .
This weighting factor enforces the tradeoff between expected
profit and risk in such a way that the higher the value of , the
more risk averse the wind producer is. Thus, if the risk is not
considered (risk-neutral case), then the value of is set to 0.
Since risk is considered throughout the entire market horizon,
then model (17)–(26) cannot be decomposed by time period.
This is so because variables and , used to compute the
CVaR over the total revenue distribution, couple the decisions
pertaining to different hours.
D. Adding an Adjustment Market
The offer model of a wind producer having the opportunity
to trade additionally in an adjustment market is as follows:

(22)
(23)

Constraints (22) make bidding curves nondecreasing, which is

a requirement in most markets. Equations (23) are nonanticipa- (27)
tivity constraints, which model the fact that only one bidding
curve can be submitted to the day-ahead market for each hour,
irrespective of the wind power and imbalance price realizations.
(28)
That is, this equation enforces nonanticipativity for the wind
power and imbalance price realizations. Note that this model (29)
is less constrained than the basic one. In fact, the basic model (30)
can be obtained from this one by rewriting the nonanticipativity (31)
constraints (23) as .
(32)
Despite including the aforementioned constraints, the offer
strategy model continues being decomposable by time period (33)
(hour). (34)
560
(35)
(36)
(37)
(38)
(39)
where is the number of time periods between the closures
of the day-ahead and adjustment markets.
Note that the consideration of the adjustment market entails
three differences with regard to the mathematical model pre-
sented in Section III-C: the first one has to do with the objective
function (27) in which the term is included to account
for the revenue obtained from trading energy in the adjustment
market. This revenue can be negative if the wind power pro-
ducer decides to purchase energy from this market. The second
difference is related to the calculation of the total energy devia-
tion (31), which, in model (27)–(39), is carried out with respect
to the final energy schedule , i.e., the summation (29)
of the amounts of energy traded in the day-ahead and adjust-
ment markets. The last change consists in adding the nonantici-
pativity constraints (37) for the decisions made in the adjustment
market. These constraints express that the amount of energy
traded in the adjustment market may be different, depending on
the day-ahead market price realization and the wind power gen-
erated after and before the closure of the day-ahead and adjust-
ment markets, respectively. Furthermore, these constraints also
ensure nonanticipativity with respect to the adjustment market
and imbalance price realizations, and the wind power realiza-
tion after the closure of the adjustment market.
However, once the position in the day-ahead market is fixed
by using model (27)–(39), a model analogous to the one pre-
sented in Section III-C can be employed to build offers for the
adjustment market.
IV. CASE STUDY
A. Data
We consider a wind farm having 40 2.5-MW commercial
wind generators. The total installed wind power capacity of
the plant is therefore 100 MW. To convert wind speed into
wind power, the power curve for a standard simulated turbine
(model Nordex N80/2500 with a hub height of 100 m) is used.
This power curve can be found in the manufacturer database
and is provided in [24]. All the turbines making up the wind
farm are assumed to be operating for the considered trading
day. The wind speed stochastic process is modeled through the
second-order autoregressive model (11), whose parameters are
fitted using the publicly available wind speed data collected
by Johnson from a location in the state of Kansas (U.S.) [25].
Specifically, the wind dataset used comprises average hourly
speed measurements from January 25 to March 31, 1996.
For clarity, the stochastic processes describing price be-
havior in the day-ahead, adjustment, and balancing markets
IEEE TRANSACTIONS ON POWER SYSTEMS, VOL. 25, NO. 1, FEBRUARY 2010
TABLE I
STOCHASTIC PROCESSES FOR PRICES AND PRICE FUNCTIONS
are modeled using simplified seasonal ARIMA models. More
refined multiseasonal models can be employed instead, as those
described, for instance, in [17]. Likewise, a more sophisticated
modeling of balancing power market prices is proposed in [26],
where seasonal ARIMA and Markov processes are combined to
capture the particularities of such prices as, e.g., the existence
of periods with no demand for balancing power. The ARIMA
models fitted for the day considered in this case study (April
1, 2008) are provided in Table I. The historical data used
for the fitting process belong to the electricity market of the
Iberian Peninsula [16], and are publicly available in [23]. These
data correspond to the working days between October 2007
and March 2008. Only working days are considered in order
to simplify the ARIMA models by eliminating the weekly
seasonality.
The numbers of scenarios for the day-ahead, adjustment, and
balancing markets are, respectively, 1000, 1000, and 1000. The
number of scenarios simulated to characterize the wind gener-
ation uncertainty is also 1000, resulting from the combination
of 20 scenarios representing the wind power realizations
in time periods between the closures of the day-ahead and ad-
justment markets, and 50 scenarios to embrace the pos-
sible wind power realizations after the clearing of the adjustment
market.
The total number of scenarios comprising the original sce-
nario tree is therefore , which clearly yields an optimization
problem that is intractable. Hence, to achieve tractability,
a scenario reduction technique [19] is applied to each sto-
chastic process, resulting in ten, five, and ten scenarios for
the day-ahead, adjustment, and balancing markets, respec-
tively, and twenty scenarios for the wind farm production
. Thus, the reduced scenario tree includes
10 000 scenarios.
Finally, a confidence level is used to compute the
CVaR in all instances.
B. On Offer Curves and Risk Control
In this section, no adjustment market is considered. The VSS
(risk-neutral case, ) is 2.294%, expressed as a percentage
of the expected profit obtained from model (17)–(26). This value
justifies the interest in using a stochastic model for solving the
wind producer problem instead of a naïve deterministic one.
In this case, offers to the day-ahead market just consist of an
optimal energy quantity submitted at zero price for each time
period. This is the case analyzed in [15]. However, these single
quantities may turn into curves if the wind producer becomes
risk averse . Table II shows the energy quantities offered
to the market for different hours in the risk-neutral situation,
and Fig. 2 depicts the resulting offer curves in the same hours if
.
MORALES et al.: SHORT-TERM TRADING FOR A WIND POWER PRODUCER 561

TABLE II TABLE III

OPTIMAL ENERGY BIDS FOR  =0 EXPECTED VALUES OF PERFECT INFORMATION

possibility of trading greater amounts of energy for high price

realizations. It should be noted that for a market requiring step-
wise offer stacks (the case of the market in the Iberian Penin-
sula), the linear blocks of the stacks shown in Fig. 2 should be
approximated by stepwise functions.
In Table III, the expected values of perfect information, EVPI
(risk-neutral case, ) are shown as improvements in per-
centage with respect to the expected profit obtained from model
(17)–(26). In light of the results presented in this table, the fol-
lowing two comments are in order. First, the economic improve-
ment produced by a perfect knowledge of day-ahead market
prices is smaller than the other two, which reveals that the uncer-
tainty associated with these prices plays a secondary role in the
wind producer offering problem. Moreover, this economic im-
provement is nil. This is due to the fact that, under the assump-
tion that wind generation is free, the maximization with
of the objective function (24) boils down to the minimization
of the imbalance cost. This cost depends on and , but is
Fig. 2. Optimal offer curves for  = 0:3.
Fig. 3. Impact of risk aversion on expected deviations.
The changes undergone by the offer curves for increasing
values are intended to reduce the expected energy traded in
the day-ahead market as the wind producer becomes more risk
averse. In fact, the policy that can be adopted by a wind power
producer to hedge against profit variability basically boils down
to trading less energy in the day-ahead market in hopes that its
additional production can be sold in the balancing market at a
still competitive price. Consequently, as the risk aversion in-
creases, the expected negative deviation incurred by the wind
producer all over the market horizon decreases at the expense of
rising the expected positive deviation. This is shown in Fig. 3.
Nevertheless, unlike submitting just a single energy value for
each time period, offering curves allows reducing the expected
energy placed in the day-ahead market while still keeping the
independent of . Second, the economic improvements due to
perfect information on wind production and imbalance price ra-
tios are equal. The reason for this is that knowing the values of
and in advance is equivalent to know perfectly the future
wind production availability from a strategic point of view.
Finally, to assess the impact of the volatility level of the
imbalance price ratios on the VSS, the VSS is also computed
considering two additional volatility levels for these price
ratios, 0.40 and 0.58 (values averaged over the 24-h market
horizon), which result in VSS of 2.573% and 3.097%, respec-
tively. Taking into account that the original volatility level and
VSS are 0.22 and 2.294%, it can be concluded that the higher
the volatility of the imbalance prices, the higher the VSS, and
the higher the interest of the proposed model.
C. On the Effects of Including an Adjustment Market
Next, we analyze the advantages of including an adjustment
market within the market structure from the perspective of a
wind producer. These advantages are contingent on the liquidity
of this market. In other words, adjustment markets with ade-
quate levels of liquidity are required to take full advantage of
the proposed technique.
Roughly speaking, the effects produced by an adjustment
market are twofold.
1) As a trading floor, it provides the market participants with
additional trading options. As a result, the expected profit
increases and/or its variability decreases.
2) The clearing of this market is closer to the delivery time,
and therefore, trading can be carried out with a diminished
level of uncertainty as for the availability of wind energy.
This is of special relevance for a wind producer and consti-
tutes the key issue to be analyzed in this section. Hereafter,
this phenomenon is referred to as certainty gain effect and
is mathematically expressed through the last line of (37).
562
Fig. 4. Impact of the certainty gain on expected wind producer imbalances.
Fig. 5. Hourly reduction in expected deviation due to the certainty gain.
Formally, the certainty gain effect can be defined as the
economic surplus that the wind power producer obtains if
it builds its offering strategy for the day-ahead market, con-
sidering that the subsequent energy trading in the adjust-
ment market can be done with a greater level of certainty
on wind energy production.
In order to isolate this second effect from the first one, the
analysis performed below is based on a comparison between the
results provided by model (27)–(39), depending on whether the
certainty gain introduced by the adjustment market is consid-
ered or not, i.e., depending on whether the second term of the
AND condition in constraints (37) is included or not.
To start with, if an adjustment market is considered in the
stochastic model, the VSS for the risk-neutral case increases
up to 3.273%, i.e., 0.979% more than the value obtained in the
previous section. However, the VSS is reduced to 2.906% if
the certainty gain is not taken into account. This result reveals
that one of the most important advantages of using a stochastic
model, instead of just a deterministic one, is indeed to consider
this phenomenon.
In Fig. 4, the expected total deviations incurred by the wind
producer all over the market horizon are compared for different
values of the weighting factor . The reduction in the expected
total amount of imbalances due to the certainty gain associated
with trading in the adjustment market is apparent. Fig. 5 shows
the value of this reduction per time periods. Note that the de-
crease in expected deviation is considerably more significant for
the first few periods, in which the volatility pertaining to wind
power generation is comparatively smaller. Needless to say, the
reduction levels achieved in these first periods could be kept
for the rest of hours by including additional adjustment markets
throughout the scheduling horizon.
The certainty gain effect involves notable changes in the offer
strategy of the wind producer, as can be observed in Fig. 6. In
this respect, note that the expected amount of energy sold in the
electricity market (see upper subplot representing the resulting
IEEE TRANSACTIONS ON POWER SYSTEMS, VOL. 25, NO. 1, FEBRUARY 2010
Fig. 6. Impact of the certainty gain on the energy amounts traded in both the
day-ahead and adjustment markets.
energy schedule) decreases as the wind producer becomes more
risk averse. As already pointed out in Section IV-B, this is the
only possible policy that a wind producer can adopt to hedge
against profit variability on its own. However, note that this de-
crease is less pronounced if the certainty gain effect is consid-
ered in the stochastic offer model. To understand the reason for
this, it should be taken into account that the certainty gain effect
translates into a better knowledge on how to offer in the adjust-
ment market in order to decrease the expected level of imbal-
ances. Thus, for low levels of risk aversion, for which the devi-
ations incurred by the wind producer are predominantly nega-
tive (see Fig. 3), the amount of energy placed in the adjustment
market diminishes in relation to the amount that would be sold
if the certainty gain were disregarded in the stochastic model
(see lower subplot in Fig. 6). The opposite effect is observed
for higher levels of risk aversion in order to reduce
the expected amount of positive imbalances appearing as a way
to reduce profit variability. On the other hand, if the certainty
gain effect is modeled, the expected amount of energy traded in
the day-ahead market (see central subplot in Fig. 6) drops so as
to prevent greater expected negative imbalances or/and uneco-
nomic energy purchases from the adjustment market.
In terms of profit, the improvements due to the certainty gain
effect can be summarized by means of Fig. 7, which represents
the optimal pairs (expected profit, CVaR) obtained for different
values of the risk aversion paramater . The resulting curve is
usually referred to as an efficient frontier. Note that the certainty
gain effect produces a displacement of the efficient frontier up-
ward and to the right, i.e., a displacement in the direction of
increasing expected profits and increasing CVaRs. Again, this
displacement could be amplified by adding to the market struc-
ture additional adjustment markets throughout the scheduling
horizon in a sequential manner. Finally, observe that a signif-
icant CVaR gain is attained for a moderate expected profit de-
crease. For instance, if the certainty gain effect is included, the
reduction suffered by the expected profit when is increased
MORALES et al.: SHORT-TERM TRADING FOR A WIND POWER PRODUCER
Fig. 7. Impact of the certainty gain on risk management (efficient frontier).
from 0 to 0.5 is 1.66%, which is considerably low in compar-
ison with the increment of 31.36% experienced by the CVaR.
The results presented in this case study support the use of
adjustment markets as efficacious trading floors to enhance the
competitiveness degree of wind producers.
However, if the proposed offering strategy model is extended
to consider longer time horizons, the results obtained by the
wind producer are expected to be better in terms of risk con-
trollability as the day-to-day profit volatility is greater than the
volatility of profit over longer time horizons. An immediate
practical implication of this would be the flattening of the ef-
ficient frontier illustrated in Fig. 7.
Likewise, the results derived from the proposed optimization
models are also contingent on the volatility of the stochastic pro-
cesses involved (wind availability and market prices). In this re-
spect, note that the higher such volatility is, the more advanta-
geous is the use of the proposed stochastic approach over a pre-
diction-based one. Stochastic programming allows increasing
the expected value of the profit distribution while keeping the
risk of profit variability under control, a risk that precisely stems
from the volatility of the input stochastic processes.
Concerning computational issues, all problems have
been solved using CPLEX 10.2.0 under GAMS [27] on a
Linux-based server with four processors clocking at 2.6 GHz
and 32 GB of RAM. The CPU time required to solve the sto-
chastic model (27)–(39) is lower than 4 s for all the simulations
carried out.
V. CONCLUSION
The methodology proposed in this paper allows to identify
bidding strategies for a wind power producer that entitle a high
decrease in the risk of profit variability for a comparatively low
reduction in expected profit. Additionally, this paper provides
a procedure to quantify the beneficial impart of a sequence of
adjustment markets following the clearing of the day-ahead
market. These adjustment markets, cleared between the clearing
of the day-ahead market and the real-time operation, allow the
producer to identify and submit offers considering a reduced
563
uncertainty level on wind power production, which result in a
comparatively higher profit and a smaller risk. A comprehensive
case study is used to illustrate how to identify the best offering
strategies and the beneficial effects of adjustment markets.
Needless to say, the proposed offering strategy model should
be supplemented with an appropriate methodology to generate
scenario sets representing the stochastic processes involved in a
precise manner. The higher the quality of these scenario sets is,
the more accurate and reliable the results provided by the pro-
posed model are, but the general conclusions presented earlier
are equally valid.
Lastly, the numerical results presented in this paper can be ex-
tended by using a chronological simulator to actually simulate
the wind producer market actions and their corresponding out-
comes during one-year horizon (or any other suitable time pe-
riod). Such a simulator requires scenario generation algorithms
for market prices and wind power spanning one year, which
are algorithms still under research. All in all, developing the
referred simulator and conducting year-wide simulations con-
stitutes a subject of further research.
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Antonio J. Conejo (F’04) received the M.S. degree
from the Massachusetts Institute of Technology,
Cambridge, in 1987 and the Ph.D. degree from the
Royal Institute of Technology, Stockholm, Sweden,
in 1990.
He is currently a Full Professor at the Universidad
de Castilla-La Mancha, Ciudad Real, Spain. His re-
search interests include control, operations, planning
and economics of electric energy systems, as well as
statistics and optimization theory and its applications.
Juan Pérez-Ruiz (S’96–M’99) received the Elec-
trical Engineering degree from the Universidad
Pontificia Comillas, Madrid, Spain, in 1992 and
the Ph.D. degree from the Universidad de Málaga,
Málaga, Spain, in 2001.
He is currently an Associate Professor at the Uni-
versidad de Málaga. His research interests include
operations, planning and economics of electric en-
ergy systems, as well as statistics and optimization
theory and its applications.

Juan M. Morales (S’07) received the Ingeniero

Industrial degree from the Universidad de Málaga,
Málaga, Spain, in 2006. He is currently pursuing
the Ph.D. degree at the Universidad de Castilla-La
Mancha, Ciudad Real, Spain.
His research interests include power systems
economics, reliability, stochastic programming, and
electricity markets.