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Energy only, capacity market and security of supply. A stochastic equilibrium analysis

Author

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  • EHRENMANN, Andreas

    (Electrabel)

  • SMEERS, Yves

    (Université catholique de Louvain (UCL). Center for Operations Research and Econometrics (CORE))

Abstract

Former generation capacity expansion models were formulated as optimization problems. These included a reliability criterion and hence guaranteed security of supply. The situation is different in restructured markets where investments need to be incentivised by the margin resulting from electricity sales after accounting for fuel costs. The situation is further complicated by the payments and charges on the carbon market. We formulate an equilibrium model of the electricity sector with both investments and operations. Electricity prices are set at the fuel cost of the last operating unit when there is no curtailment, and at some regulated price cap when there is curtailment. There is a CO2 market and different policies for allocating allowances. Todays situation is quite risky for investors. Fuel prices are more volatile than ever; the total amount of CO2 allowances and the allocation method will only be known after investments has been decided. The equilibrium model is thus one under uncertainty. Agents can be risk neutral or risk averse. We model risk aversion through a CVaR of the net margin of the industry. The CVaR induces a risk neutral probability according to which investors value their plants. The model is formulated as a complementarity problem (including the CVaR valuation of investment). An illustration is provided on a small problem that captures the essence of today electricity world: a choice restricted to coal and gas, a peaky load curve because of wind penetration, uncertain fuel prices and an evolving carbon market (EU-ETS). We show that we might have problem of security of supply if we do not implement a capacity market.

Suggested Citation

  • EHRENMANN, Andreas & SMEERS, Yves, 2008. "Energy only, capacity market and security of supply. A stochastic equilibrium analysis," LIDAM Discussion Papers CORE 2008007, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  • Handle: RePEc:cor:louvco:2008007
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    File URL: https://sites.uclouvain.be/core/publications/coredp/coredp2008.html
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    Cited by:

    1. Egging, Ruud & Pichler, Alois & Kalvø, Øyvind Iversen & Walle–Hansen, Thomas Meyer, 2017. "Risk aversion in imperfect natural gas markets," European Journal of Operational Research, Elsevier, vol. 259(1), pages 367-383.
    2. Rolf Golombek & Kjell Arne Brekke & Michal Kaut & Sverre A.C. Kittelsen & Stein W. Wallace, 2016. "Stochastic equilibrium modeling: The Impact of Uncertainty on the European Energy Market," EcoMod2016 9201, EcoMod.
    3. Jacqueline Boucher & Yves Smeers, 2011. "Energy Security and Long-term Arrangements," Chapters, in: Jean-Michel Glachant & Dominique Finon & Adrien de Hauteclocque (ed.), Competition, Contracts and Electricity Markets, chapter 1, Edward Elgar Publishing.
    4. Gregor Zöttl, 2010. "A Framework of Peak Load Pricing with Strategic Firms," Operations Research, INFORMS, vol. 58(6), pages 1637-1649, December.
    5. Brekke, Kjell Arne & Golombek, Rolf & Kaut, Michal & Kittelsen, Sverre A.C. & Wallace, Stein W., 2017. "Stochastic energy market equilibrium modeling with multiple agents," Energy, Elsevier, vol. 134(C), pages 984-990.

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    Keywords

    capacity adequacy; risk functions; stochastic equilibrium models;
    All these keywords.

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