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Risk aversion in multilevel electricity market models with different congestion pricing regimes

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  • Ambrosius, Mirjam
  • Egerer, Jonas
  • Grimm, Veronika
  • van der Weijde, Adriaan H.

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.

Suggested Citation

  • Ambrosius, Mirjam & Egerer, Jonas & Grimm, Veronika & van der Weijde, Adriaan H., 2022. "Risk aversion in multilevel electricity market models with different congestion pricing regimes," Energy Economics, Elsevier, vol. 105(C).
    • Handle: RePEc:eee:eneeco:v:105:y:2022:i:c:s0140988321005521
    DOI: 10.1016/j.eneco.2021.105701
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    More about this item

    Keywords

    Risk aversion; Zonal pricing; Investment; Electricity markets; Stochastic programming;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General
    • R32 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Other Spatial Production and Pricing Analysis

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