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On the role of risk aversion and market design in capacity expansion planning

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  • Fraunholz, Christoph
  • Miskiw, Kim K.
  • Kraft, Emil
  • Fichtner, Wolf
  • Weber, Christoph

Abstract

Investment decisions in competitive power markets are based upon thorough profitability assessments. Thereby, investors typically show a high degree of risk aversion, which is the main argument for capacity mechanisms being implemented around the world. In order to investigate the interdependencies between investors' risk aversion and market design, we extend the agent-based electricity market model PowerACE to account for long-term uncertainties. This allows us to model capacity expansion planning from an agent perspective and with different risk preferences. The enhanced model is then applied in a multi-country case study of the European electricity market. Our results show that assuming risk-averse rather than risk-neutral investors leads to slightly reduced investments in dispatchable capacity, higher wholesale electricity prices, and reduced levels of resource adequacy. These effects are more pronounced in an energy-only market than under a capacity mechanism. Moreover, uncoordinated changes in market design may also lead to negative cross-border effects.

Suggested Citation

  • Fraunholz, Christoph & Miskiw, Kim K. & Kraft, Emil & Fichtner, Wolf & Weber, Christoph, 2021. "On the role of risk aversion and market design in capacity expansion planning," Working Paper Series in Production and Energy 62, Karlsruhe Institute of Technology (KIT), Institute for Industrial Production (IIP).
    • Handle: RePEc:zbw:kitiip:62
    DOI: 10.5445/IR/1000140411
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    Cited by:

    1. Möbius, Thomas & Riepin, Iegor & Müsgens, Felix & van der Weijde, Adriaan H., 2023. "Risk aversion and flexibility options in electricity markets," Energy Economics, Elsevier, vol. 126(C).

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    Keywords

    Agent-based simulation; Capacity expansion planning; Risk aversion; Electricity market design; Energy-only market; Capacity mechanism;
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