Bidding Wind and Solar: A Theory of Price Premia in Sequential Electricity Markets

Price premia between day-ahead and intraday electricity markets are well documented and often attributed to factors such as forecast errors or market frictions. However,existing explanations provide limited insight into why these price premia can exhibit a systematic diurnal structure, as observed in the German market. This paper provides a structural explanation by linking price premia to the bidding behavior of renewable producers. I develop a stylized two-stage model in which renewable producers determine their day-ahead bids under different bidding rationales, including expected-production bidding, risk-neutral bidding, and risk-averse bidding that accounts for tail risk. Closed-form solutions for day-ahead bids and the resulting price premia are derived and evaluated using a calibration to German market data. The results show how bidding behavior interacts with supply curve convexity and forecast uncertainty to translate risk preferences of renewable producers into systematic price premia. In particular, heterogeneous bidding behavior across renewable technologies replicates the diurnal pattern of price premia observed in the German market: negative premia around midday and positive premia during morning and evening hours arise when PV producers bid expected production while wind producers follow a risk-averse strategy. The findings suggest that observed price premia reflect both risk preferences and institutional features of renewable energy marketing, which may warrant reconsideration.