FOCUS ARTICLE Risk mitigation in the electricity market driven by new renewable energy sources Nikola Kre car | Andrej F. Gubina Faculty of Electrical Engineering, University of Ljubljana, Ljubljana, Slovenia Correspondence Nikola Kre car, Faculty of Electrical Engineering, University of Ljubljana, Kongresni trg 12, 1000 Ljubljana, Slovenia. Email: nikola@krecar.eu Funding information Javna Agencija za Raziskovalno Dejavnost RS, Grant/Award Number: P2-0356 Abstract An important indicator of supply and demand uncertainty on electricity markets is risk premium (RP), an integral part of electricity price. The level of RP is describ- ing the risk the market actors expect in the future due to the market uncertainties. With the electricity market price behavior rapidly changing, the rising market sup- ply uncertainty is increasing the volatility of RP. To better understand this behav- ior, power market participants need new models that will efficiently use the information available in the processes driving the electricity price and RP and to explain the influence of RES uncertainties on the future RP and electricity prices. A decade ago, researchers investigating RP focused primarily on the uncertainties arising from consumption forecast and generation outages. RES share in generation mix was small and its influence on uncertainty was negligible, leading to much lower volatilities of RP than today. With the increasing influence of RES, typically exhibiting variability on a sub-hourly level, traditional models using daily electric- ity price to calculate RP were becoming inadequate. In this dynamic period of elec- tricity market transformation, this paper highlights the importance of RP signals to market actors. A stochastic method for RP calculation is discussed with the associ- ated RP model, driven by the intraday dynamics. An example of the RP signal is presented on historical price data from the German electricity market, highlighting uncertainty pattern developed over the years. With such an approach, the market actors can adjust their trading strategies thus mitigating their market risk exposure. This article is categorized under: Energy Systems Economics > Economics and Policy Energy Efficiency > Economics and Policy Energy Systems Analysis > Economics and Policy KEYWORDS electricity markets, electricity price, jump-diffusion models, Monte Carlo simulations, PV production, RES production, risk driver factors, risk model, risk premium, wind production 1 | INTRODUCTION In the electricity market, price is the main indicator of the balance between electricity supply and demand (ENTSO-E, 2011). Unlike other commodities that use storage or sufficiently controllable supply to manage occasional supply shortages, Received: 26 March 2019 Revised: 13 July 2019 Accepted: 22 July 2019 DOI: 10.1002/wene.362 WIREs Energy Environ. 2019;e362. wires.wiley.com/energy © 2019 Wiley Periodicals, Inc. 1 of 14 https://doi.org/10.1002/wene.362