Energy Reserve Trade Optimization for Wind Generators Using Black and Scholes Options in Small-Size Power Systems

Tremendous attention has been paid to wind energy. This renewable source of clean energy has become very appealing to investors, engineers, and environmentalists. From the power system operations perspective, the uncertain nature of wind power poses serious challenges. To reduce the effect of wind power uncertainty, a reserve procurement methodology using financial derivative such as “Options” is very promising. This paper proposes a new optimization model to procure secondary reserves to overcome wind power uncertainty by using Black and Scholes financial options while estimating short-term wind energy forecast errors by using the Gaussian distribution function. The proposed model integrates power system security constraints. At the optimal solution, the lambda multiplier associated with real power balance equations provides option premiums and strike prices.