Centralized volatility reduction for electricity markets

•Deep penetration of wind energy leads to highly volatile market prices.•Existing electricity market designs are not adequate to address the increased financial risks due to wind energy.•An add-on centralized mechanism is designed, with theoretical guarantees to reduce volatilities.•The proposed mechanism is applicable to any existing wholesale market design. Increased penetration of wind energy will make electricity market prices more volatile. As a result, market participants will bear increased financial risks, which impact investment decisions and in turn, makes it harder to achieve sustainable energy goals. As a remedy, in this paper, we propose an insurance market that complements any wholesale market design. Our mechanism can be run by any suitable financial entity such as an independent system operator, with the aim of reducing the financial impacts of volatile prices. We provide theoretical guarantees, analytically characterize the outcomes over a copperplate power system example, and numerically explore the same for a modified IEEE 14-bus test system.