**4. The Short-Term Energy Contract**

The short-term energy (STE) contract is a new type of bilateral contract—and to some extent a new market product—that presents some similarities with the aforementioned bilateral contracts, although there are obvious differences. The specifications of the contract are shown in Table 1. It has the goal of allowing agents to reduce/avoid imbalances and consequently the potential payment of penalties—that is, it is not a profit-seeking product. Accordingly, the energy price is pre-defined as the market-clearing price (DAM price) for the period under consideration. The minimal energy quantity is 0.1 MWh. Agents submit to a trading platform bids involving specific energy quantities for periods of 15 min (and not one hour). Bids may be new or associated with energy deviations and should be submitted up to one hour prior to real-time operation. Buy and sell bids likely to interfere with each other generate transactions and new contracts. To this end, the trading platform takes into account energy quantities only (quantities may be either fully or partially matched). Bids associated with deviations have priority over new bids and are matched according to a principle of equity. Physical delivery is done in strict accordance with transmission system operators, who are informed about the terms and conditions of new contracts (energy price, energy quantity, etc.).


**Table 1.** Main specifications of the short-term energy contract.

Now, an important feature—and to the best of our knowledge—a novel feature of the STE contract is the inherent aspect of considering energy and not power. Figure 2 illustrates this aspect by depicting bids involving either power (green line) or energy (blue line). Bids are assumed to be simple and consist of quantities and other parameters that are deemed appropriate (e.g., match type). The settlement period has the duration of 15 min. Existing bilateral contracts consider typically a quantity based on power, meaning that power plants should follow a constant production schedule during the settlement period (green line of Figure 2, corresponding to a quantity of 50 MW). This may not be adequate for wind power producers and other VRE producers due to the uncertainty and variability of renewable generation. Accordingly, the SET contract considers a quantity based on energy—that is, power plants do not necessarily need to follow a constant production schedule during the settlement period (orange line of Figure 2, corresponding to an average quantity of 12.5 MWh). This typically leads to a decrease of the imbalances and the associated costs (but see the real-world study presented in Section 8). Overall, despite the existence of a number of contracts traded in energy markets worldwide, such as daily future contracts or even 15-min base and peak contracts (see, e.g., [29,30]), it is especially noteworthy that we are aware of no contracts similar to the short-term energy contract. At this stage, we note that an appealing alternative to the short-term energy contract involves the submission of both energy price and energy quantity (instead of energy quantity only). However, energy would be traded at different prices and, to some extent, some transactions would not be considered due to the mismatch of price.

**Figure 2.** Real production of a hypothetical variable renewable energy (VRE) producer (orange line) and bids of power (green line) and energy (blue line) for a settlement period of 15 min.


**Table 2.** Important features of the renewable power band marketplace.

#### **5. Trading Reserve Capacity**

## *5.1. Renewable Power Band Marketplace*

As noted earlier, the work published in [11] analysed the benefits of the participation of wind power producers in balancing markets at both economic and technical levels. We found that a reduction of the market time unit from 1 h to 15 min is beneficial to WPPs. Accordingly, this section considers a market time unit of 15 min—that is, WPPs submit bids for periods of 15 min, and not for periods of 1 h. In other words, capacity reserve is traded for 15-min periods. To this end, we also consider that VRE producers participate in this marketplace by using the frequency control capacity, offering a power band for each 15-min period, and thus participating with scarce real-time instantaneous power. The upper limit should be lower than the expected optimal power, and the lower limit should be higher than the technical capacity of VRE producers to reduce generation from an optimal (or intermediary) level to a lower one. Also, bids may involve either positive or negative power intervals and not necessarily intervals ranging from negative to positive values, as typically happens in existing secondary reserve markets. Market participants are allowed to submit bids till 15 min prior to real-time operation. They are remunerated by the secondary reserve price. Table 2 presents some important features of this marketplace. Figure 3 illustrates the trading behavior of VRE producers, by showing the different bids and the associated deviations, for a period of one hour.

**Figure 3.** Bids associated with an hypothetical VRE producer for a period of one hour (four periods of 15 min).

Figure 3 is, to some extent, similar to Figure 1, which shows the traded/scheduled power, *Pbid*(*T*), the corresponding energy, *Ebid*(*T*), the real production of a wind power producer, *p*(*t*), and the energy deviation, *Edev*(*T*). In addition, Figure 3 also shows the lack of deviations resulting from the participation in this marketplace—that is, the deviations that are avoided by WPPs—represented by the green area (see also Section 8).

VRE producers should guarantee that they are able to comply with their bids (in order to avoid the payment of penalties). Accordingly, for each 15-min period, the maximum power that they can bid, *PRPBbid*, is given by the difference between the minimum deviation and the traded bid (see Equation (3)). The wasted energy associated with the accepted bids is equal to the area between the solid blue curve and the dashed green curve (see Figure 3).
