Dogan Keles

A survey of stochastic modelling approaches for liberalised electricity markets

Liberalisation of energy markets, climate policy and the promotion of renewable energy have changed the framework conditions of the formerly strictly regulated energy markets. Generating companies are mainly affected by these changing framework conditions as they are exposed to the different risks from liberalised energy markets in combination with huge and largely irreversible investments. Uncertainties facing generating companies include: the development of product prices for electricity as well as for primary energy carriers; technological developments; availability of power plants; the development of regulation and political context, as well as the behaviour of competitors. The need for decision support tools in the energy business, mainly based on operation research models, has therefore significantly increased. Especially to cope with different uncertain parameters, several stochastic modelling approaches have been developed in the last few years for liberalised energy markets. In this context, the present paper aims to give an overview and classification of stochastic models dealing with price risks in electricity markets. The focus is thereby placed on various stochastic methods developed in operation research with practical relevance and applicability, including the concepts of: - stochastic processes for commodity prices (especially for electricity); - scenario generation and reduction, which is important due to the need for a structured handling of large data amounts; as well as - stochastic optimising models for investment decisions, short- and mid-term power production planning and long-term system optimisation. The approaches within the energy business are classified according to the above structure. The practical relevance of the different methods and their applicability to real markets is thereby of crucial importance. Shortcomings of existing approaches and open issues that should be addressed by operation research are also discussed.

Compressed-air energy storage power plant investments under uncertain electricity prices: an evaluation of compressed-air energy storage plants in liberalized energy markets

In this paper a combined approach is introduced, integrating electricity prices simulated with the help of a financial model into an optimization model that evaluates a compressed-air energy storage (CAES) plant investment. The financial model based on a regime-switching approach delivers suitable price paths. Based on these price paths, the optimization model maximizes the annual return of the CAES plant, taking bidding strategies on the spot and reserve power markets into account. A Monte Carlo simulation is carried out for the annual return, which, in turn, is used to determine the expected net present value (NPV). A negative NPV is obtained when applying an interest rate of 6%. Thus, the investment in current CAES plants is not attractive, as energy companies generally expect an annual yield over 8%.

Self-Consumption of Electricity from Renewable Sources

Self-consumption can facilitate the integration of variable renewables onto the grid and lower the overall costs of the energy system through load shifting. However, the self-consumption potential is limited without further technical enhancements in storage and demand response solutions. Such solutions can both facilitate a larger share of self-consumption and lower additional costs arising from photovoltaics integration. Unleashing the full potential that lies within the transition from passive consumers to active prosumers further requires information and communications technology solutions and smart battery-charging algorithms. This is necessary to ensure the exchange of information between the grid and prosumers, and thus a smooth integration of overproduction into the grid. Self-consumption is profitable for consumers if the costs of locally produced renewables are lower than retail electricity prices. If such a parity of costs is achieved, support schemes such as feed-in tariffs could be phased out. However, a high penetration of self-consumption solutions might lead to an unfair distribution of network charges, taxes, and levies. Future energy policy should therefore consider how to best reallocate costs.

Extreme Value Theory for Heavy-Tails in Electricity Prices

Typical characteristics of electricity day-ahead prices at the European Power Exchange (EPEX) are very high volatility and a large number of extreme price changes. In this paper, we look at hourly spot prices at the German electricity market and apply extreme value theory (EVT) to investigate the tails of the price change distribution. Our results show the importance of delimiting price spikes and modelling them separately from the core of the price distribution. In particular, we get a realistic fit of the generalized Pareto distribution (GPD) to autoregressive–generalized autoregressive conditional heteroscedasticity (AR–GARCH) filtered price change series; based on this model, accurate forecasts of extreme price quantiles are obtained. Generally, our results suggest that EVT is of interest for both risk managers and portfolio managers in the highly volatile electricity market.

An analysis of long-term impacts of demand response on investments in thermal power plants and generation adequacy

In liberalized energy markets, the issue of generation adequacy gains more and more in importance. Especially demand response is regarded as a crucial measure to handle supply and demand imbalances caused by inflexible renewable energy resources (RES) power production. However, the influence of demand response on wholesale electricity prices has not been sufficiently analyzed up to now.

An assessment of the newly proposed strategic reserve in Germany

In order to deal with the effects of the “Energiewende”, in November of 2014 the German government outlined the future regulatory framework of the national electricity market. Among the suggested new measurements is a strategic reserve that will be used in situations of peak demand when in the spot market clearing cannot be achieved. The size of this strategic reserve is expected to be around 5 GW, approximately 5% of the current peak load. In this paper, for the first time a detailed agent-based simulation model is used to analyze the effects of the implementation of a strategic reserve on electricity prices and investments. The results show that this instrument considerably improves the security of supply and its yearly costs range from 50 to 300 million Euros depending on market scarcity. However, in extreme situations, e.g., high penetration of fluctuating renewable energy sources and very volatile cash flows for investors, capacity markets might provide more efficient ways to ensure security of supply.

Analysis of Bidding Strategies in the German Control Reserve Market [in press]

This paper analyzes bidding strategies in the German control reserve market, a multi-part pay-as-bid auction. We present a methodology to investigate multivariate time series under consideration of exogenous factors and apply it to real data. As results, we examine exogenous drivers of control reserve power prices, identify the efficient set of bidding strategies and analyze the serial correlation of applied bids in the period 2015 to 2017. The efficient set consists of two clusters - increased capacity price bid with moderate energy price bid and increased energy price bid with moderate capacity price. Combined with game-theoretic rationales, we are able to explain the price development and draw conclusions on how to prevent the application of bidding strategies in the control reserve market.

Price-based versus load-smoothing pumpec storage operation: Long-term impacts on generation adequacy

With rising shares of fluctuating renewable energy generation, the role of electricity storage becomes increasingly important. However, European pumped storage plants (PSPs) are currently confronted with economic challenges and their potential for smoothing the residual load curve is consequently not fully exploited. In this paper, the long-term effects of load-smoothing and the typical price-based PSP operation are compared with an emphasis on the development of the wholesale electricity prices and the generation adequacy. The study is conducted using an agent-based simulation model of the day-ahead electricity market that has been extended by a methodology to heuristically dispatch the PSPs in Germany. The results show, that the contribution load-smoothing PSP operation can make to improving generation adequacy is rather small. Putting a strategic reserve in place reduces the differences between price-based and load-smoothing PSP operation even further. Moreover, load-smoothing PSP operation goes along with slightly increased wholesale electricity prices as compared to price-based operation.

Chapter 14 – Introduction

This chapter illustrates the background of renewable energy expansion due to different support schemes in the EU. It highlights the impact of renewable energy on grid and market operation and the challenges the electricity sector faces since the strong expansion of renewable energy in some Member States. Finally, the structure for the whole section is introduced in this chapter giving a short overview of what will be presented in the upcoming chapters.

Chapter 19 – Conclusions and Outlook

The main impacts of renewable energies on grid and market operation and the required changes in market design are discussed in this chapter. The main conclusions derived from the previous chapters about the height of, e.g., curtailment of renewable energy sources (RES) due to grid congestions are introduced. The merit order effect of renewables on market prices and necessary changes in regulation, especially in the design of electricity markets, are discussed. Finally, areas of future research are mentioned, especially the need for research to gain further findings about the impact of RES electricity production in the future and to determine the most effective and efficient regulative measures to react to the RES impacts.