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Does risk aversion affect transmission and generation planning? A Western North America case study

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  • Munoz, Francisco D.
  • van der Weijde, Adriaan Hendrik
  • Hobbs, Benjamin F.
  • Watson, Jean-Paul

Abstract

We investigate the effects of risk aversion on optimal transmission and generation expansion planning in a competitive and complete market. To do so, we formulate a stochastic model that minimizes a weighted average of expected transmission and generation costs and their conditional value at risk (CVaR). We show that the solution of this optimization problem is equivalent to the solution of a perfectly competitive risk-averse Stackelberg equilibrium, in which a risk-averse transmission planner maximizes welfare after which risk-averse generators maximize profits. This model is then applied to a 240-bus representation of the Western Electricity Coordinating Council, in which we examine the impact of risk aversion on levels and spatial patterns of generation and transmission investment. Although the impact of risk aversion remains small at an aggregate level, state-level impacts on generation and transmission investment can be significant, which emphasizes the importance of explicit consideration of risk aversion in planning models.

Suggested Citation

  • Munoz, Francisco D. & van der Weijde, Adriaan Hendrik & Hobbs, Benjamin F. & Watson, Jean-Paul, 2017. "Does risk aversion affect transmission and generation planning? A Western North America case study," Energy Economics, Elsevier, vol. 64(C), pages 213-225.
  • Handle: RePEc:eee:eneeco:v:64:y:2017:i:c:p:213-225
    DOI: 10.1016/j.eneco.2017.03.025
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    1. repec:eee:eneeco:v:65:y:2017:i:c:p:304-314 is not listed on IDEAS
    2. repec:eee:enepol:v:114:y:2018:i:c:p:566-577 is not listed on IDEAS
    3. repec:eee:eneeco:v:64:y:2017:i:c:p:131-148 is not listed on IDEAS
    4. repec:eee:eneeco:v:64:y:2017:i:c:p:55-62 is not listed on IDEAS

    More about this item

    Keywords

    Risk aversion; Stochastic programming; Transmission and generation planning; Investment;

    JEL classification:

    • P18 - Economic Systems - - Capitalist Systems - - - Energy; Environment
    • C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C69 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Other
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General

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