Optimal contract for wind power in day-ahead electricity markets

The growth of wind energy production poses several challenges in its integration in current electric power systems. In this work, we study how a wind power producer can bid optimally in existing electricity markets. We derive optimal contract size and expected profit for a wind producer under arbitrary penalty function and generation costs. A key feature of our analysis is to allow for the wind producer to strategically withhold production once the day ahead contract is signed. Such strategic behavior is detrimental to the smooth functioning of electricity markets. We show that under simple conditions on the offered price and marginal imbalance penalty, a risk neutral profit maximizing wind power producer will produce as much as wind power is available (up to its contract size).