In the rapidly evolving landscape of renewable energy, virtual power plants (VPPs) are emerging as a critical tool for integrating distributed energy resources (DERs) and ensuring grid stability. As governments worldwide commit to net-zero emissions targets, the role of VPPs in electricity markets becomes increasingly significant. However, the question of which auction mechanism—pay-as-bid (PAB) or pay-as-clear (PAC)—best supports VPP operations and market stability remains a contentious issue. New research from Youngkook Song at Seoul National University’s Department of Electrical and Computer Engineering sheds light on this debate, offering insights that could reshape the future of energy markets.
The study, published in Energies (which translates to ‘Energies’ in English), delves into the complexities of VPP bidding strategies under different auction mechanisms and imbalance penalty structures. Song’s research employs a sophisticated three-stage stochastic programming model to simulate various market scenarios, providing a comprehensive analysis of VPP behaviors and their commercial impacts.
At the heart of the debate are the two primary auction mechanisms: PAB and PAC. In PAB markets, successful bidders are compensated at the price they submitted, while in PAC markets, all successful bids are settled at the uniform market-clearing price. This distinction significantly influences VPP bidding strategies and market operations, particularly in managing financial risks and imbalance penalties.
“Our findings reveal that while PAC markets offer higher VPP revenues due to settlement at the market-clearing price, they also exhibit greater volatility and elevated imbalance penalties,” Song explains. The study found that power deviations in PAC markets were 52.60% higher than in PAB markets under specific penalty structures, with imbalance penalty costs differing by up to 82.32%. This volatility can lead to unpredictable revenue outcomes and challenges to market stability.
In contrast, PAB markets foster stable, stepwise bidding strategies that minimize imbalance penalties and improve renewable energy utilization. “The PAB mechanism consistently led to lower imbalance penalties and more consistent power generation schedules, especially during high- and moderate-power-generation periods,” Song notes. This stability is crucial for supporting the integration of renewable energy resources and ensuring reliable market operations.
The implications of this research are far-reaching for the energy sector. As the global VPP market is projected to surpass USD 4.7 billion by 2027, expanding at a robust compound annual growth rate of 34%, the need for sophisticated bidding strategies and stable market operations becomes ever more pressing. Song’s findings suggest that PAB markets may be better suited for electricity markets with high DER penetration, offering substantial advantages in promoting market stability and supporting renewable energy integration.
The study’s insights highlight the importance of designing and implementing appropriate auction mechanisms and penalty structures to enhance the effectiveness and reliability of electricity markets. As the energy sector continues to evolve, the lessons learned from this research could shape the future of VPP operations and market design, paving the way for a more sustainable and stable energy landscape.
