I. Introduction
THE price formation process in electricity markets follows the fundamental micro economic principle in which market equilibrium is reached when the aggregated supply-side curve, determined by the offered units of output and the corresponding bidding price, intersects the demand curve. The supply curve is always monotonically increasing since output offers are ‘stacked up’ from lower to higher bidding price for each settlement hour. In most jurisdictions, on the other hand, the output from wind farms is given priority over conventional generation and integrated into the market whenever available (unless operational requirements call for curtailments). This is done during the market settlement (usually day-ahead) by assigning a zero bidding price to the forecasted output from the wind farms so that it will always lie at the bottom of the supply stack. Wind power and other generation technologies with dispatch priority are then assumed as ‘price-takers', which means that their output is sold in the market at the clearing price in similar conditions as the rest of the conventional generators.