Risk sharing strategy for minimizing imbalance costs of wind power forecast errors

The increasing penetration of intermittent wind power significantly affects the reliability of power systems. The difference between the forecasted and real wind power needs to be balanced by external sources in electricity markets, for example, ancillary services. Imbalance costs arise from the costs of generation reserve for compensating the supply-demand imbalance caused by incorrect wind power forecasts. Because forecast errors are inevitable due to unstable weather conditions, trading wind power in a short-term energy market encounters significant risks under the current trading mechanisms. This paper proposes a risk sharing strategy for wind forecast errors. We bring in the idea of an insurance, which involves pooling funds among wind power generators for individual imbalance costs. The detailed calculations of insurance premiums are also given, based on the perspective of an insurance company through a Value at Risk (VaR) approach. Our study results illustrate that a hybrid ESS and risk sharing strategy is promising in terms of mitigating risks of trading wind power in short-term electricity markets.