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Multistage stochastic portfolio optimisation in deregulated electricity markets using linear decision rules

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  • Rocha, Paula
  • Kuhn, Daniel

Abstract

The deregulation of electricity markets increases the financial risk faced by retailers who procure electric energy on the spot market to meet their customers’ electricity demand. To hedge against this exposure, retailers often hold a portfolio of electricity derivative contracts. In this paper, we propose a multistage stochastic mean–variance optimisation model for the management of such a portfolio. To reduce computational complexity, we apply two approximations: we aggregate the decision stages and solve the resulting problem in linear decision rules (LDR). The LDR approach consists of restricting the set of recourse decisions to those affine in the history of the random parameters. When applied to mean–variance optimisation models, it leads to convex quadratic programs. Since their size grows typically only polynomially with the number of periods, they can be efficiently solved. Our numerical experiments illustrate the value of adaptivity inherent in the LDR method and its potential for enabling scalability to problems with many periods.

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  • Rocha, Paula & Kuhn, Daniel, 2012. "Multistage stochastic portfolio optimisation in deregulated electricity markets using linear decision rules," European Journal of Operational Research, Elsevier, vol. 216(2), pages 397-408.
    • Handle: RePEc:eee:ejores:v:216:y:2012:i:2:p:397-408
    DOI: 10.1016/j.ejor.2011.08.001
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    Cited by:

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    6. Xie, Y.L. & Huang, G.H. & Li, W. & Ji, L., 2014. "Carbon and air pollutants constrained energy planning for clean power generation with a robust optimization model—A case study of Jining City, China," Applied Energy, Elsevier, vol. 136(C), pages 150-167.
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    10. Juan M. Gómez & Yeny E. Rodríguez, 2022. "Multiperiod Portfolio of Energy Purchasing Strategies including Climate Scenarios," Energies, MDPI, vol. 15(9), pages 1-25, April.
    11. Gauvin, Charles & Delage, Erick & Gendreau, Michel, 2018. "A stochastic program with time series and affine decision rules for the reservoir management problem," European Journal of Operational Research, Elsevier, vol. 267(2), pages 716-732.
    12. Frans J. C. T. Ruiter & Aharon Ben-Tal & Ruud C. M. Brekelmans & Dick Hertog, 2017. "Robust optimization of uncertain multistage inventory systems with inexact data in decision rules," Computational Management Science, Springer, vol. 14(1), pages 45-66, January.
    13. Xiaojia Guo & Alexandros Beskos & Afzal Siddiqui, 2016. "The natural hedge of a gas-fired power plant," Computational Management Science, Springer, vol. 13(1), pages 63-86, January.
    14. Barbara Glensk & Reinhard Madlener, 2013. "Multi-period portfolio optimization of power generation assets," Operations Research and Decisions, Wroclaw University of Science and Technology, Faculty of Management, vol. 23(4), pages 20-38.
    15. Downward, Anthony & Young, David & Zakeri, Golbon, 2016. "Electricity retail contracting under risk-aversion," European Journal of Operational Research, Elsevier, vol. 251(3), pages 846-859.
    16. Moreira, Alexandre & Pozo, David & Street, Alexandre & Sauma, Enzo & Strbac, Goran, 2021. "Climate‐aware generation and transmission expansion planning: A three‐stage robust optimization approach," European Journal of Operational Research, Elsevier, vol. 295(3), pages 1099-1118.
    17. Xiangyi Fan & Grani A. Hanasusanto, 2024. "A Decision Rule Approach for Two-Stage Data-Driven Distributionally Robust Optimization Problems with Random Recourse," INFORMS Journal on Computing, INFORMS, vol. 36(2), pages 526-542, March.
    18. Charwand, Mansour & Gitizadeh, Mohsen & Siano, Pierluigi, 2017. "A new active portfolio risk management for an electricity retailer based on a drawdown risk preference," Energy, Elsevier, vol. 118(C), pages 387-398.
    19. Kovacevic, Raimund M. & Pflug, Georg Ch., 2014. "Electricity swing option pricing by stochastic bilevel optimization: A survey and new approaches," European Journal of Operational Research, Elsevier, vol. 237(2), pages 389-403.
    20. Ethem Çanakoğlu & Esra Adıyeke, 2020. "Comparison of Electricity Spot Price Modelling and Risk Management Applications," Energies, MDPI, vol. 13(18), pages 1-22, September.
    21. Xie, Y.L. & Xia, D.H. & Ji, L. & Zhou, W.N. & Huang, G.H., 2017. "An inexact cost-risk balanced model for regional energy structure adjustment management and resources environmental effect analysis-a case study of Shandong province, China," Energy, Elsevier, vol. 126(C), pages 374-391.
    22. Guigues, Vincent & Juditsky, Anatoli & Nemirovski, Arkadi, 2021. "Constant Depth Decision Rules for multistage optimization under uncertainty," European Journal of Operational Research, Elsevier, vol. 295(1), pages 223-232.
    23. Pérez Odeh, Rodrigo & Watts, David & Flores, Yarela, 2018. "Planning in a changing environment: Applications of portfolio optimisation to deal with risk in the electricity sector," Renewable and Sustainable Energy Reviews, Elsevier, vol. 82(P3), pages 3808-3823.
    24. Debbie Dupuis, Geneviève Gauthier, and Fréderic Godin, 2016. "Short-term Hedging for an Electricity Retailer," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2).

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