Impacts of Forecasting Errors in Centralized and Decentralized Electricity Markets

A decentralization of electricity markets, with an introduction of smaller local marketplaces, is sometimes suggested as a suitable development when a growing share electricity generation comes from distributed sources. This paper presents a stylized model for comparing market outcomes between a decentralized and a centralized market structure, focusing on the effect that forecasting errors have on market outcomes. Using Monte Carlo simulations, it is shown that forecasting errors propagate into somewhat larger scheduling errors under a decentralized market structure.