2021 NANJING
Financial Risk Management for Intermittent
Renewable Energy Trading in Deregulated Power
Markets: A Systematic Review
Dongliang Xiao
School of Electric Power
2021 IEEE Sustainable Power and Energy Conference (iSPEC) | 978-1-6654-1439-5/21/$31.00 ©2021 IEEE | DOI: 10.1109/iSPEC53008.2021.9736012
South China University of Technology South China University of Technology
Guangzhou, China
dxiao@scut.edu.cn
Bifei Tan
School of Electric Power
South China University of Technology South China University of Technology
Guangzhou, China
tanbifei0487@hotmail.com 201920113380@mail.scut.edu.cn
Abstract— In deregulated power markets, renewable energy
producers need to manage the financial risks caused by volatile
electricity prices and intermittent power productions. In this
paper, financial risk management approaches for intermittent
renewable energy trading in power markets are systematically
reviewed. Firstly, the overall framework of financial risk
management for renewable energy trading in power market is
addressed, where main risk factors and risk management
instruments are comprehensively illustrated. Next, this paper
introduces the financial instruments used for managing price
risks in power markets, such as forward contract, electricity
derivatives, virtual bidding and financial transmission right
(FTR), as well as the physical instruments used for managing
power production risks, such as energy storage devices, demand
response programs, energy conversion devices and flexible
generation resources. Afterwards, three types of widely used
risk-aware optimization techniques are illustrated in detail,
which include stochastic optimization, robust optimization and
information gap decision theory (IGDT)-based optimization.
Finally, the conclusions and potential future research works on
this topic are summarized.
Keywords— financial instruments, power market, renewable
energy, risk management, stochastic optimization
I. INTRODUCTION
The installed capacity of renewable energy has been
increasing rapidly in the last two decades, which plays crucial
roles in solving energy crisis issue and achieving carbon
neutrality target [1]. However, the power productions of
renewable energy resources, such as wind turbines and
solar panels, are affected by weather conditions significantly,
which makes them difficult to be estimated and controlled. As
a result, the intermittent characteristics of renewable energy
pose challenges to both system operators and renewable
energy producers in power grid, where the real-time balancing
of electricity supplies and demands need be satisfied to ensure
power system reliability.
In deregulated power markets, apart from the risks caused
by intermittent renewable energy productions, energy
producers also need to face the risks associated with volatile
electricity prices. Since electric power cannot be stored in an
economic manner and both power demands and renewable
power productions are pretty sensitive to weather conditions,
978-1-6654-1439-5/21/$31.00 ©2021 IEEE
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Haoyong Chen Xinyun Dai
School of Electric Power School of Electric Power
South China University of Technology
Guangzhou, China Guangzhou, China
eehychen@scut.edu.cn epxinyun@mail.scut.edu.cn
Jianping Huang
School of Electric Power
Guangzhou, China
the electricity prices in deregulated power markets are usually
much more volatile than those of other commodities, such as
crude oil, natural gas and agriculture products [2]. Moreover,
in recent years, extreme weather events have been occurring
more and more frequently due to global climate change, which
further increase the price risks in power markets [3]. In
February 2021, a winter storm brought extreme cold weather
to Texas in the US, and the real-time electricity prices at 9:00
am CT were near 9000 $/MWh at most of the pricing nodes
due to the sharp drop in energy supply [4]. As a result, the
largest power generation and transmission cooperative in
Texas, Brazos Electric Power Cooperative, filed for
bankruptcy because of the power outages and high prices in
wholesale power market [5].
Therefore, to ensure power system reliability and social
welfare maximization of electricity market participants, it is
necessary for renewable energy producers to develop effective
financial risk management strategies in power markets by
fully utilizing the available instruments and state of the art
decision making methodologies.
There are abundant research works on financial risk
management for energy trading in power markets, where
various instruments and optimization techniques have been
taken into account. The authors of [6] discussed the financial
instruments available in electricity markets considering their
design mechanisms and pricing methodologies, and the risk
hedging strategies for the power producers, load serving
entities, and power marketers in various applications were
addressed in detail. In [7], the risk management techniques
widely used in finance area and their applications in electricity
markets were introduced considering the special properties of
electricity assets and the policies of electricity market, and the
suggestions for future research works were also mentioned.
However, few works present a systematic survey on the
financial risk management for renewable energy producers,
whose characteristics are very different from those of
conventional power producers. Additionally, some financial
instruments in certain power markets, such as virtual bidding
widely adopted in the day-ahead and real-time electricity
markets of the United States, have not been addressed in detail.
Therefore, this paper presents a systematic survey on the
financial risk management for renewable energy trading in
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Power Market
Cash flow Energy flow
Cash flow
Weather Intermittent Physical
Energy flow
Conditions renewable energy Instruments
Cash flow
Financial
Instruments
Fig. 1. Overall framework of the energy and cash flows for the renewable
energy producer
power markets, which mainly include the overall framework,
physical/financial instruments and risk-aware optimization
techniques considering uncertainties. Specifically, the
remaining parts of this paper is organized as follows: Section
II presents the overall framework of energy/cash flows for the
renewable energy producer, based on which the main risk
factors are analyzed. Section III describes the existing
financial and physical instruments used for risk management.
In Section IV, risk-aware optimization techniques considering
uncertainties are introduced. Finally, conclusions and future
research works are provided in Section V.
II. OVERALL FRAMEWORK
The overall framework of energy and cash flows for the
renewable energy trading in power markets is depicted in
Fig.1, where the profit of a renewable energy producer is
mainly determined by its renewable power production,
electricity prices and deviation penalties in power market.
In practice, both the electricity prices and renewable
power productions are pretty sensitive to the weather
conditions. For instance, on the power demand side, the power
consumptions of air conditioners in summer usually varies
with outdoor temperature, and on the power supply side, wind
and solar power productions are related to wind speed and
solar irradiance, respectively, which would affect prices in
power markets significantly. The renewable energy producers
usually submit their generation offers to day-ahead electricity
markets one day before the power delivery based on their
forecast results, and the power deviations between their day-
ahead commitments and real-time power productions would
usually be charged with deviation penalties, which lead to
financial losses.
To manage the price and volumetric risks, renewable
energy producers can utilize various instruments and
optimization techniques to develop efficient risk management
strategies. Specifically, the risk management instruments
available for the renewable energy producers can be
categorized into physical and financial instruments, where the
financial instruments are mainly used for managing price risks
and the physical instruments are mainly used for managing
power production risks, which would be illustrated in detail in
Section III. To fully consider the statistical properties of
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Futures Options Swaps CAES
Battery Hydrogen
Hydro
Standardized electricity derivatives Energy storage device pump
Forward
Energy conversion
contract
Financial Physical device
Instruments Instruments
Virtual bidding Demand response
Financial transmission right Flexible generation resource
Fig. 2. Financial and physical instruments used for the risk management of
renewable energy trading.
uncertain model parameters, financial/physical properties of
risk management instruments, and the policies of power
market, risk-aware optimization techniques can be employed
by the renewable energy producers to develop efficient energy
trading strategies considering their specific risk preferences.
III. RISK MANAGEMENT INSTRUMENTS
The main financial and physical instruments used for the
risk management of renewable energy trading in power
markets are shown in Fig. 2, which would be introduced in
Section III-A and III-B, respectively.
A. Financial Instruments
To manage the price risks in power markets, there are
several types of financial instruments to utilize for power
market participants, which mainly include customized
forward contract, standardized electricity derivatives [6],
financial transmission right (FTR) [8][9], virtual transactions
[10][11], and PPA contracts [12], etc.
1) Electricity Derivatives
Electricity forward contract specifies the obligation of
buying or selling a fixed amount of power in the future at a
fixed price at a specified time, where the trading quantity, time
and price are negotiated between power seller and purchaser.
In contrast, the standardized electricity derivatives available
in organized exchanges, such as electricity futures, options
and swaps, cannot be customized so flexibly as forward
contracts. Specifically, electricity call and put options specify
the rights of buying or selling a fixed amount of power at a
fixed strike price by their expiration times, respectively.
Electricity swap is a type of financial contract that requires the
swap holder pay a fixed price for the power over specified
time periods, which is not affected by the stochastic electricity
price in the spot power market. In [13], a stochastic decision
making model for an electricity retailer trading in futures
market and pool-based electricity market considering scenario
reduction. In [14], energy call option was employed in the
optimal bidding problem of a generator in spot electricity
markets considering the uncertainties in fuel supply, and a
desired risk-adjusted return was ensured.
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INC DEC
DA Market
DA power DA power
withdrawal
injection DA power flow
Source node Sink node
RT Market
RT power RT power
withdrawal injection
RT power flow
Source node Sink node
Fig. 3. Mechanism of UTC transaction in the nodal power market with two-
settlement structure
2) Virtual Bidding
Virtual bidding is a financial instrument designed based on
the two-settlement structure of the US power market, and
there are three types of virtual bids, which are increment offer
(INC), decrement bid (DEC) and up to congestion (UTC)
transaction. Specially, INC is selling power in DA market at a
pricing node and buying it back in RT market at DA electricity
price; in contrast, DEC is buying power in DA market at a
pricing node and selling it back in RT market at RT electricity
price. Different from INC and DEC bid used at one pricing
node, UTC is selling and buying same quantities of power at
two nodes on a path simultaneously. In [10], a strategic retailer
using virtual bidding was modeled and studied by using
stochastic bilevel optimization technique, where the
maximum virtual bidding capacity was determined by the
available credit in the trading account. In [11], the impacts of
INCs and DECs on two-settlement electricity markets with
wind power generation were investigated by using
equilibrium models, and it was shown that virtual bidder with
accuracy forecast results could enhance the market efficiency.
In [15], an optimal UTC bidding strategy considering risk
management was developed for a financial participant, and
case studies were carried out by using the data and policies in
PJM electricity market to show its effectiveness.
3) Financial Transmission Right
FTR is another type of financial instrument in US markets
used for managing the power congestion risks, whose value is
the day-ahead price difference between two pricing nodes in
power network. FTR can be obtained from annually/monthly
auctions or secondary bi-lateral market in the US. Even
though FTR is designed for hedging congestion risks, it might
also be utilized by some market participants with virtual bids
to pursue profits, which is not allowed according to anti-
market manipulation rules. In [16], a risk-constrained FTR
bidding strategy was proposed based on the forecasted
probability distribution of locational marginal price (LMPs)
differences between sink and source nodes of FTRs, where the
preferred risk levels of bidders were taken into account.
Additionally, even though standardized electricity
derivatives are still not available in China and the spot
electricity market constructions in some provinces have not
been yet completed, participants can trade power in medium-
and long-term markets, which include the one-year bilateral
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contracts that can be signed between power generation
companies and load serving entities, and monthly centralized
auctions organized by power exchange centers [17].
B. Physical Instruments
Apart from the risks caused by the price risks in power
markets, the renewable energy traders also needs to face the
volumetric risks of the intermittent renewable energy
productions. In practice, if the actual renewable power
production deviates a lot from the scheduled quantity, the
renewable energy producer may need to pay a penalty for the
power deviations. However, existing electricity derivatives
can only be used for hedging the price risks, which is not
suitable for managing power production risks. As a result,
physical instruments would be more effective for the
renewable energy producers’ portfolio optimization problems.
1) Energy Storage
Different types of energy storages have been adopted to
manage the risks of intermittent renewable energy. In [18],
mobile energy storages were utilized by a virtual power plant
with different physical assets at multiple pricing nodes, where
multi-type energy and reserve markets were taken into
account. In [19], an integrated operation strategy of wind
power and hydrogen storage was studied in detail, and
hydrogen was used for generating electric power and fueling
vehicles. In [20], a wind power producer was equipped with a
hydro-pump storage to mitigate the uncertainties of wind
power, and it was shown that penalties of power imbalances
in the market could be reduced effectively. In [21], a
compressed air energy storage (CAES) system was utilized to
develop an adaptive robust self-scheduling strategy for a wind
power producer in the day-ahead energy market, and both the
flexibility and robustness were verified via case studies. In
[22], a day-ahead scheduling strategy for wind power and
multi-type energy storage devices was presented, and
electricity, natural gas, and heating networks were included,
which could reduce wind power curtailments and increase the
operational flexibility of integrated energy system. In [23], a
joint energy and reserve bidding strategy is developed for
wind farms and P2G facilities by using a cooperative game
method, and it shows that purchasing reserve can reduce the
imbalance penalties. In [24], the thermal storage capability of
concentrating solar power was utilized to mitigate the
uncertainties of wind and solar power generations in
deregulated power markets, and a profit-sharing mechanism
was designed for the owners of wind power and CSP plants.
In [25], the economic values of battery storages with different
characteristics, such as depth of discharge, initial charge state,
and number of charging and discharging cycles, were
investigated for a Microgrid with renewable energy resources.
2) Demand Response Program
Demand response programs also have been taken account
in the risk-constrained optimization problems for renewable
energy producers. In [26], to achieve the significant renewable
energy penetration targets set by many countries, demand
response program in real-time balancing market is proposed
to handle the imbalances between power supplies and
demands. In [27], coupon-based demand response (C-DR)
programs were developed for load serving entities considering
wind power in ISO's economic dispatch process, which is
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H2 O CO2
Natural
Electricity H2 gas
Electrolysis Sabatier
process process
2H2 O → 2H2 + O2 CO2 + 4H2 → CH4 + 2H2 O
Fig. 4. Mechanism of Power to Gas Device
formulated as a bi-level optimization problem. In [28], an
intraday demand response exchange (DRX) market was
proposed to increase the profit and renewable energy
utilization of a VPP, and the bidding strategies were generated
by solving a three-stage stochastic program. In [29], the
industrial loads in cement plants were employed to provide
operational flexibility in power grid, and onsite energy storage
is used by the industrial consumer to provide regulation
service. In [30], the demand flexibility of smart buildings were
explored by building aggregators combined heat and power
units, and a comprehensive demand response considering both
energy substitution and load shifting was proposed.
3) Energy Conversion Device
Additionally, energy conversion devices can be used to
convert intermittent renewable power into other types of
energy, such as hydrogen, heat and natural gas, which can be
stored more efficiently and economically. In [31], power to
gas (P2G) technology was adopted to consider the
complementarity of electricity and natural gas networks,
based on which case studies were carried out for the market
equilibrium problem. The basic mechanism of the power to
gas storage is shown in Fig. 4, and it mainly includes two
processes. First, the water is split into hydrogen and oxygen
through electrolysis, in which process the electricity is
consumed. Then, the generated hydrogen interacts with
carbon dioxide in the Sabatier and natural gas is produced. In
[32], a cooperative game approach was proposed to generating
trading strategy for wind power and P2G facilities in energy
and reserve markets, and it was shown that purchasing reserve
could avoid imbalance penalties of intermittent wind power.
In [33], an energy sharing model was developed for the
aggregators with P2G devices, plug-in hybrid electric and
hydrogen vehicles considering the privacy protection of
aggregators.
Stochastic
Optimization
Risk-Aware Robust
Optimization Techniques Optimization
IGDT-based
Optimization
Fig. 5. Risk-aware optimization techniques considering uncertainties
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IV. RISK-AWARE OPTIMIZATION MODEL
Based on the available financial and physical instruments
mentioned in the last section, optimal renewable energy
trading strategies considering risk management can be
developed by using the optimization techniques according to
the risk preference of renewable energy producer, where the
policies of power markets and properties of instruments can
be fully considered. Three types of widely used risk-ware
optimization techniques are shown in Fig. 5, which would be
described in this section.
A. Stochastic Optimization
In existing research works, stochastic optimization
technique is widely used to generate risk-aware renewable
energy trading strategies in power markets. In a stochastic
model, the uncertain parameters, such as electricity prices
and renewable energy productions, are represented via
scenarios, which are usually generated by using probabilistic
model- or artificial intelligence-based methods [34] [35]. To
management the risks in a stochastic optimization model, risk
measure- and stochastic dominance-based approaches have
been adopted in the literature.
1) Risk Measure-based Framework
In a risk measure-based model, the objective function is
the weighted sum of total expected profit and a risk measure,
which can be expressed as (1).
Maximize (1-β)E{f(x, ζ)} + βR{ f(x, ζ)} (1)
where 𝑥, ζ and f(x, ζ) are decision variable vector, random
parameter vector and expected profit distribution, respectively.
E{f(x, ζ)} and R{ f(x, ζ)} are the expected profit and risk
measure of the decision maker, respectively. β is the risk
averse degree of the renewable energy producer and the risk
measure could be variance, conditional value at risk (CVaR),
Value at risk (VaR) or shortfall probability [36]. In this
circumstance, the conservativeness of the renewable energy
trading strategy is increased with the weight of risk measure,
thus the risk aversion degree of the renewable energy producer
can changed by adjusting the value of β. In [37] and [38],
CVaR was adopted by risk-averse wind power producers
trading in the day-ahead and real-time electricity market,
where bilevel optimization was used to consider their market
power. The authors of [36] provided the risk-averse decision
making models based on variance, VaR and shortfall
probability, which are not used so widely as CVaR in the
existing publications on power economics.
Stochastic Dominance Variance
Value at Risk
Risk Measure
Conditional Value at Risk
Robustness function
Shortfall Probability
Opportunity function
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2) Stochastic Dominance-based Framework
In a stochastic dominance-based model, stochastic
dominance constraints are added to a risk-neutral stochastic
model, which can enforce the expected profit distribution
outperform a benchmark profit distribution selected by the
decision maker. This stochastic dominance-based approach is
more flexible than the risk measure-based approach, because
the shape of entire profit distribution can be managed by
adjusting the benchmark distribution. However, if the
benchmark is selected properly, the optimization model might
be infeasible, thus the stochastic dominance-based approach
more complicated than the risk measure-based one, which
limits its application in practice. In [39], a stochastic
dominance-based mid-term self-scheduling model was
proposed for large consumer, and case studies were carried out
for a typical cement to verify its effectiveness. In [2], second-
order stochastic dominance constraints (SOSDCs) were
utilized by a wind power producer participating in day-ahead
and real-time markets, and a novel benchmark selection
method is proposed considering its feasibility.
3) Scenario Reduction for Stochastic Optimization
To characterize the uncertain parameters and model the
potential risks accurately, the scenario number of stochastic
model is usually very large, which may render the stochastic
problem intractable. To solve this issue, scenario reduction
algorithms can be applied to reduce the scenario number and
decrease the computational cost without losing much the
stochastic information of the original scenario sets [13].
B. Robust Optimization
In a robust optimization model, the uncertain parameters
are characterized by using confidence intervals, based on
which the worst case of uncertainties can be evaluated and
optimized. Given the risk preference of decision maker, the
risk level of a robust model can be adjusted by changing the
range of confidence interval. Compared with stochastic
optimization, robust optimization model is easier to be
constructed and solved, because the probabilistic forecast and
large number of scenarios are not required. In [40], a robust
optimization model was developed for a price-taker virtual
power plant in two-settlement electricity market, where the
uncertainties in wind-power and electricity prices were
characterized via confidence bounds. In [41], a bilevel robust
optimization model was used for decision making of electric
vehicle charging stations with renewable energy, and the
uncertainties of plug-in electric vehicle flows were taken into
account. In [42], a robust peer-to-peer (P2P) trading
framework was developed for interconnected microgrids with
significant wind power, where Nash bargaining is utilzed to
encourage active energy transaction and fair benefit sharing.
In [43], an electricity market clearing mechanism was
proposed considering distribution locational marginal price
(DLMP) and the robust economic dispatch problem of
distribution system and microgrids. In [44], a robust
operational equilibrium model was developed for electricity
and gas markets considering bidirectional gas flow
characteristics, and the wind power uncertainties are further
handled by using bilateral energy and reserve contracts.
However, even though robust optimization has been
widely used in power system operation and planning
applications, it is not so popular for developing trading
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strategies in electricity markets, because the results obtained
by solving a robust model tend to be too conservative.
C. IGDT-Based Optimization
IGDT is a non-probabilistic approach for decision making
problems with uncertainties, where assumptions on
probability distributions of uncertain parameters are not
required. Therefore, the IGDT-based optimization technique
is suitable for the situations that involve severe uncertainties
or lack enough historical information, where the uncertain
parameter is characterized by using an interval around the
forecasted result. By using robustness and opportunity
functions in the model, the IGDT-based approach can
generate optimistic and pessimistic solutions that guarantee a
certain value for the objective, respectively. In [45],
information gap decision theory was employed to handle the
uncertainty associated with renewable energy resources for
the self-scheduling of a virtual power plant, where both
robustness and opportunity functions were studied in the case
studies. In [46], an IGDT-based optimal bidding strategy was
developed for a distributed energy resource aggregator, which
does not require the specific probability distribution pattern of
uncertain wind and solar power productions, and the
potentials of obtaining high-profit or achieving stability of the
strategy were both verified via simulation results.
V. CONCLUSIONS
This paper carried out a systematic review on the financial
risk management for renewable energy trading in power
markets. Based on the cash and energy flows of the renewable
energy producer participating in power markets, the main risk
factors and risk management instruments were presented.
Next, the financial and physical instruments used for
alleviating price and power production risks are pointed out.
To develop efficient renewable trading strategies considering
risk management in power markets, three types of widely used
risk-aware optimization techniques, stochastic optimization,
robust optimization and IGDT-based optimization, were
comprehensively illustrated and analyzed. In the future works,
on the basis of this review, the risk management
methodologies for renewable energy trading could be further
summarized and illustrated in a more comprehensive manner
under the specific market frameworks in different
countries/regions, and other types of physical and financial
instruments could also be taken into account.
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