Risk Aversion in Multilevel Electricity Market Models With Different Congestion Pricing Regimes

39 Pages Posted: 16 Mar 2020

See all articles by Mirjam Ambrosius

Mirjam Ambrosius

Friedrich-Alexander-Universität Erlangen-Nürnberg

Jonas Egerer

University of Erlangen-Nuremberg-Friedrich Alexander Universität Erlangen Nürnberg

Veronika Grimm

University of Erlangen-Nuremberg-Friedrich Alexander Universität Erlangen Nürnberg - School of Business & Economics

Adriaan H. van der Weijde

The University of Edinburgh

Date Written: February 20, 2020

Abstract

Due to ongoing efforts for decarbonization, electricity markets worldwide are undergoing fundamental transitions, which result in increased uncertainty for all market participants. Against this background, we investigate the impact of risk aversion on investment and market operation in markets with different congestion pricing regimes and multi-level decision making. We develop a stochastic multi-level equilibrium model with risk-averse agents, which includes investment in transmission and generation capacity, market operation, and redispatch. The model can incorporate perfect, as well as imperfect locational price signals and different upper-level expectations about lower-level risk aversion.

We apply our model to a stylized two-node example and compare the effects of risk aversion in a system with zonal and nodal pricing, respectively. Our results show that the effect of risk aversion is more pronounced in a market with nodal pricing, compared to a market with imperfect locational price signals. Furthermore, transmission planners that are ignorant about risk aversion of generation companies can induce substantial additional costs, especially in a nodal pricing market.

Keywords: OR in energy, risk-averse investment, stochastic programming, electricity market modeling, multilevel optimization

JEL Classification: C6, L9

Suggested Citation

Ambrosius, Mirjam and Egerer, Jonas and Grimm, Veronika and van der Weijde, Adriaan H., Risk Aversion in Multilevel Electricity Market Models With Different Congestion Pricing Regimes (February 20, 2020). Available at SSRN: https://ssrn.com/abstract=3541599 or http://dx.doi.org/10.2139/ssrn.3541599

Mirjam Ambrosius

Friedrich-Alexander-Universität Erlangen-Nürnberg ( email )

Lange Gasse 20
Lange Gasse 20,
Nürnberg, 90403
Germany

Jonas Egerer (Contact Author)

University of Erlangen-Nuremberg-Friedrich Alexander Universität Erlangen Nürnberg ( email )

Fachbereich Rechtswissenschaft
Schillerstr. 1
Erlangen, DE 91054
Germany

Veronika Grimm

University of Erlangen-Nuremberg-Friedrich Alexander Universität Erlangen Nürnberg - School of Business & Economics ( email )

Nuremburg
Germany

Adriaan H. Van der Weijde

The University of Edinburgh ( email )

Edinburgh
United Kingdom

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