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Risk aversion and technology mix in an electricity market

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  • Guy Meunier

    (ALISS - Alimentation et sciences sociales - INRA - Institut National de la Recherche Agronomique, X-DEP-ECO - Département d'Économie de l'École Polytechnique - X - École polytechnique - IP Paris - Institut Polytechnique de Paris)

Abstract

This article analyzes the eff ect of risk and risk aversion on the long-term equilibrium technology mix in an electricity market. It develops a model where fi rms can invest in baseload plants with a fi xed variable cost and peak plants with a random variable cost, and demand for electricity varies over time but is perfectly predictable. At equilibrium the electricity price is partly determined by the random variable cost and the returns from the two kinds of plants are negatively correlated. When the variable cost of the peak technology is high the return of peak plants is low but the return to baseload plants is high. Risk-averse fi rms reduce the capacity of the riskiest technology and develop the capacity of the other, compared to risk-neutral fi rms. In the particular case where a risk-neutral fi rm invests heavily in baseload technology and only sparely in peak capacity, a risk-averse fi rm would invest less in baseload, increase peak capacity, and increase total installed capacity.

Suggested Citation

  • Guy Meunier, 2013. "Risk aversion and technology mix in an electricity market," Working Papers hal-00906944, HAL.
    • Handle: RePEc:hal:wpaper:hal-00906944
    Note: View the original document on HAL open archive server: https://hal.science/hal-00906944v1
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    Cited by:

    1. Dimanchev, Emil & Gabriel, Steven A. & Reichenberg, Lina & Korpås, Magnus, 2024. "Consequences of the missing risk market problem for power system emissions," Energy Economics, Elsevier, vol. 136(C).
    2. Koltsaklis, Nikolaos E. & Nazos, Konstantinos, 2017. "A stochastic MILP energy planning model incorporating power market dynamics," Applied Energy, Elsevier, vol. 205(C), pages 1364-1383.
    3. 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.
    4. Bublitz, Andreas & Keles, Dogan & Zimmermann, Florian & Fraunholz, Christoph & Fichtner, Wolf, 2018. "A survey on electricity market design: Insights from theory and real-world implementations of capacity remuneration mechanisms," Working Paper Series in Production and Energy 27, Karlsruhe Institute of Technology (KIT), Institute for Industrial Production (IIP).
    5. Samir Jeddi & Dominic Lencz & Theresa Wildgrube, 2021. "Complementing carbon prices with Carbon Contracts for Difference in the presence of risk - When is it beneficial and when not?," EWI Working Papers 2021-9, Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI).
    6. Guy Meunier, 2014. "Risk Aversion and Technology Portfolios," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 44(4), pages 347-365, June.
    7. Do, Hung Xuan & Nepal, Rabindra & Jamasb, Tooraj, 2020. "Electricity market integration, decarbonisation and security of supply: Dynamic volatility connectedness in the Irish and Great Britain markets," Energy Economics, Elsevier, vol. 92(C).
    8. Bichuch, Maxim & Hobbs, Benjamin F. & Song, Xinyue, 2023. "Identifying optimal capacity expansion and differentiated capacity payments under risk aversion and market power: A financial Stackelberg game approach," Energy Economics, Elsevier, vol. 120(C).
    9. Yang, Yingkui & Solgaard, Hans Stubbe & Haider, Wolfgang, 2016. "Wind, hydro or mixed renewable energy source: Preference for electricity products when the share of renewable energy increases," Energy Policy, Elsevier, vol. 97(C), pages 521-531.
    10. Bublitz, Andreas & Keles, Dogan & Zimmermann, Florian & Fraunholz, Christoph & Fichtner, Wolf, 2019. "A survey on electricity market design: Insights from theory and real-world implementations of capacity remuneration mechanisms," Energy Economics, Elsevier, vol. 80(C), pages 1059-1078.

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