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On efficiency, savings, wealth transfers and risk-aversion in electricity markets with uncertain supply

Ryan Cory-Wright(ryancw***at***mit.edu)
Golbon Zakeri(g.zakeri***at***auckland.ac.nz)

Abstract: This paper studies the wealth transfers which arise from implementing a stochastic program in a single-settlement energy-only pool market and establishes when the SP mechanism leads to lower clearing prices, lower consumer costs and higher generator costs, or vice versa. By implementing the SP mechanism in the New Zealand Electricity Market, we uncover computational evidence that the wealth transfer from consumers to generators can be an order of magnitude larger than the cumulative system savings. We also consider participants who are risk averse and model their risk aversion using law-invariant coherent risk measures. We uncover a closed form characterization of the optimal pre-commitment behaviour for a given real-time dispatch policy, with arbitrary risk aversion. When participants cannot trade risk, a risked equilibrium exists which provides less pre-commitment than when participants are risk-neutral. Alternatively, when participants trade a rich set of financial instruments, a second risked equilibrium exists which provides more pre-commitment than when generators are risk-neutral. Consequently, introducing an auxiliary risk market alters the energy-only market by increasing pre-commitment, depressing nodal prices and providing a wealth transfer from generators to consumers.

Keywords: Wind energy, Stochastic programming, Spot market, Coherent risk measure, Risky equilibria, Risk trading

Category 1: Stochastic Programming

Category 2: Other Topics (Game Theory )

Category 3: Applications -- OR and Management Sciences (Finance and Economics )

Citation: Technical report, Operations Research Center, Massachusetts Institute of Technology, March 2018

Download: [PDF]

Entry Submitted: 03/04/2018
Entry Accepted: 03/04/2018
Entry Last Modified: 03/04/2018

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