**1. Introduction**

Energy markets (EMs) are a complex and continuously evolving reality, meaning that new players are emerging—chief among these are the producers of variable renewable energy (VRE)—and new challenges need to be managed—such as the ones associated with the participation of VRE producers in competitive markets [1,2]. Indeed, recent years have witnessed a substantial increase of non-controllable or variable renewable energy, notably wind power and solar photovoltaic. VRE has several unique characteristics compared to those of conventional generation, including significant fixed capital costs but near-zero or zero production costs. VRE is also normally the marginal resource, since it is operated at maximum capacity (taking into account the weather conditions). These characteristics have a strong influence on the outcomes of EMs, reducing market-clearing prices [3]. Accordingly, the research community has paid attention to the effectiveness of current market designs to determine if they are still efficient to deal with the increasing levels of VRE (see, e.g., [4,5]).

VRE typically involves significant forecast errors, which may result in large imbalances. The day-ahead market (DAM) closes normally at 12:00 p.m. (CET), and thus the bids of wind power producers need to be calculated by taking into account power forecasts computed 12 to 36 h ahead. As a result, an adjustment of the gate closure to a time closer to real-time operation seems to be important to enable a fair participation of VRE producers. The differences between the quantities of energy produced and the commitments resulting from the DAM need to be balanced in the intra-day market and/or the balancing market. At present, the participation of VRE producers in balancing markets (BMs) is still very limited, despite the technical feasibility and the (potential) motivation to operationalize such participation.

To address the issues associated with the participation of VRE producers in markets, adaptations to the current market structure as well as new elements of market design have been proposed by theorists and practitioners working on the area of competitive energy markets. For instance, the International Energy Agency points out that the physical transactions of electrical energy in power systems with high shares of VRE need to be made by considering auctions and centralized pools, and should not take into account feed-in-tariffs or other supporting schemes. The process of trading energy also needs to be improved by defining the terms of the transactions up to 30 min before real-time operation with an interval up to 10 min [6]. This near real-time negotiation is also supported by the Clean Energy Package (Article 7), published by the European Commission [7]. In this package, a new proposal for regulating the Internal Market for Electricity is presented, with the main goals of stimulating the global leadership of Europe in renewables, harmonizing markets rules, supporting the integration of VRE, and increasing the general welfare of consumers (see [8] for a complete overview). Article 6 of the new proposal indicates that market operators should develop new products to accommodate the increasing levels of VRE and support demand-response programs.

Now, generally speaking, European markets typically allow bidding up to 5 to 30 min before real-time operation, contributing to reduce the imbalances resulting from VRE producers. The markets of North-America and Australia present some additional flexibility by including 5-min real-time (sub-)markets. Despite this, most real-world markets operate by considering power (MW) and not energy (MWh), thus allowing to some extent substantial deviations of VRE producers.

Against this background, this article presents a new bilateral energy contract, called short-term energy (STE) contract, and introduces two new marketplaces that may allow to reduce the imbalances resulting from VRE producers (we note that throughout the article the terms "new marketplace" and "new market product" will be used interchangeably). The main aim is to enable an active and competitive participation of VRE producers in energy markets, decreasing imbalances and the associated costs, and to some extent avoiding the waste of energy. The new contract and the design of the new marketplaces take into account the following aspects: legal basis, market time unit, minimum bid quantity, transaction time horizon, type of market participant, and the role of participants in the process of trading energy. The authors are aware of no similar market products in place in the real-world.

Furthermore, the article presents a simulation-based study to analyze the behavior (and test) the new contract and the design of the new market places in a real-world setting. The study involves the participation of both wind power producers (WPPs) and retailers in markets, who prepare bids according to different strategies. The simulations are performed with the help of the agent-based tool called MATREM (see [9,10]). Six key performance indicators (KPIs) are considered, namely the value of wind energy to the market, the global imbalances of the system, the imbalances and costs of WPPs and retailers, and the total cost of the system.

The work presented here builds on our previous work in the areas of trading wind power in markets [11,12] and portfolio optimization of retailers [13]. Specifically, in [11], we investigated the benefits of the participation of WPPs in BMs at both economic and technical levels. In [12], we analyzed the impact of the wind power forecast uncertainty and the change of the day-ahead market gate closure on market outcomes. In [13], we introduced a model for optimizing the portfolios of retailers using the Markowitz theory. In this paper, as noted, we present and test a contract and two marketplaces related to the participation of VRE producers in energy markets.

The remainder of the paper is structured as follows. Section 2 presents the main features of existing energy markets. Section 3 discusses the participation of VRE producers in balancing markets. Section 4 presents the new energy contract and Section 5 the new marketplaces. Section 6 summarizes the features of the MATREM system. Section 7 illustrates the trading behavior of WPPs by taking into account the new contract and marketplaces. Section 8 presents the simulation-based study and discusses the experimental results. Finally, Section 9 presents some concluding remarks.

## **2. Energy Markets and VRE Producers**

Day-ahead markets close typically at 12:00 p.m., 12 to 36 h before physical delivery. Market participants trade energy on exchanges or pools using programs based on the system marginal pricing theory. Prices and quantities are calculated in a specific day *D* for every hour of day *D* + 1. Intra-day markets are essentially markets involving scheduling and pricing procedures a few hours ahead to facilitate balancing in advance of real-time. Such markets may involve various sessions based on auctions or may operate continuously (see, e.g., [14]). Most American markets also include a short term market, generally referred to a real-time market, to set prices and schedules for 5-min periods (but see [3]).

Derivatives are financial instruments that include forwards, futures, options and swaps [15]. These instruments are essentially contracts to buy or sell a specific amount of electricity at a certain future time for a specific price. They may span from days to several years and allow market participants to hedge against the financial risk inherent to day-ahead and intra-day prices [16]. Also, they may be financial (involving a purely financial settlement) or physical (involving a financial settlement and the physical delivery of energy), and are typically traded in derivatives exchanges. In short, market participants submit orders to sell or buy electricity in an electronic trading platform. Orders include the quantity and the price as well as several other parameters that are deemed appropriate. The trading platform automatically and continuously matches the orders that are likely to interfere with each other (typically, for a particular type of contract and a specific energy price). Also, apart from derivatives exchanges, bilateral contracts—such as forwards and swaps—may be negotiated privately between two parties. The terms of such contracts are very flexible and can be defined to meet the objectives and needs of both parties (but see [17] for a more in-depth discussion).

Balancing markets are imposed by the European Network of transmission system operators and allow to compensate the deviations from the schedules defined in day-ahead and intra-day markets, as well as in bilateral contracts. The players that deviate typically need to pay penalties. The system operators have access to reserve capacity for the provision of system services, namely primary reserve (or frequency control reserve), secondary reserve (or fast active disturbance reserve), and tertiary reserve (or slow active disturbance reserve). Primary reserve is the first to be activated, after grid disturbances or imbalances between production and consumption. It must be activated up to 15 s and the disturbances need to be controlled in 30 s. Secondary reserve should be fully activated in 30 s and can continue active for a maximum of 15 min. Tertiary reserve is activated manually, up to 15 min, and can continue active for hours (see, e.g., [8]).

Secondary and tertiary reserve are traded by system operators in day-ahead tenders. In short, these agents define the needs of the power system for up and down-regulation, receive the proposals of the authorized participants, and determine schedules and prices by using an algorithm based on the system marginal pricing theory. Typically, different simulations are performed for computing the price for up and down-regulation. Now, apart from bilateral contracts and derivatives exchanges, balancing markets are most important for the work described here, and the next section is devoted to the participation of VRE producers in such markets.

#### **3. Participation of VRE Producers in Balancing Markets**

## *3.1. Status of some European Countries and Product Analysis*

Considering the technical feasibility of the participation of wind power producers in balancing markets, several authors acknowledge this possibility, in case the current market rules and product specifications are adapted (see, e.g., [18–20]). In this way, and although with some restrictions, notably the fact that WPPs need to prepare bids aggregated with conventional generation, Spain [18], Germany [19] and Denmark [20] have already allowed the participation of WPPs in BMs (although for downward regulation only).

Great Britain allowed WPPs to participate in two curtailment products, namely "manage constraint" and "rebalance system", receiving 40% more money to curtail energy than to produce it, which is often not considered an efficient way to use VRE (but see [21]). In Belgium, some researchers studied the participation of WPPs in BMs, considering the downward automatic-activated frequency restoration reserve (aFRR), obtaining a reliability higher than 90% (see [22]). And for the case of EU-28, a study considering the participation of WPPs, solar producers and other renewable energy producers in BMs, indicated a reduction of 6% in the costs associated with such markets [23].

Now, considering existing and emerging market products associated with VRE producers and BMs, the provision of reactive power may be considered an important product [24]. Also, primary reserve is a potential product for VRE producers, contributing to compensate the disadvantage of a reduced inertia in power systems with high levels of VRE [25]. Photovoltaic systems do not have mass inertia and can adjust their output within milliseconds. Wind turbines can deliver primary reserve faster than is currently required. Also, wind turbines can deliver synthetic inertia, which can solve the problem of the reduced inertia of the grid due to high shares of VRE [26]. In this way, the well-known ramping products [27] and the P2X solutions [28] are important aspects to explore. We note, however, that fast ramping schedules in frequency control ancillary services (FCAS) can avoid the curtailment of VRE, although some limitations prevent an adequate participation of VRE producers (e.g., fixed sloping schedules). Also, the prices associated with power to X solutions (P2X), such as power-to-hydrogen, are currently very low.

All of the mentioned "products"share a common shortcoming: they contribute to an increase of the waste of energy or curtailment of VRE, by making VRE producers participating in non-optimal schedules. Furthermore, all of them consider the technical capabilities of VRE, instead of the optimal use of VRE without curtailments, wasting energy and allowing a large (short-term) interaction between market participants, notably VRE producers, retailers and transmission system operators (TSOs).
