Cost Causation Based Allocations of Costs for Market Integration of Renewable Energy

An important problem in modern electrical power systems is the inherent variability and uncertainty of renewable energy resources. Allocating the costs generated by the variable resources in a just and reasonable manner is crucial for economic efficiency. In this paper, we develop an axiomatic framework for allocating the deviation costs generated by variable resources using the cost causation based principle. The cost causation principle has a long historical tradition in electrical energy systems and has been proved to provide economic efficiency. We apply the new cost causation based framework to allocate the cost in the production deviation of a group of renewable energy producers and thereby help promote the market integration of renewable energy. The resulting cost allocation framework is then applied to five wind power producers bidding in the Iberian electricity market in Europe, using real data on wind speeds and market prices.