Dominik Möst

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.

Market power in the German wholesale electricity market

Since 2001, wholesale electricity prices have increased dramatically in Europe and especially in Germany. It has been argued that utilities have been exercising market power by withholding available power plant capacity. In this paper we investigate the exercise of market power in the German wholesale electricity market with an agent-based simulation model that uses detailed German wholesale power market data. The analysis was carried out for the years 2001, 2004, 2005 and 2006. We start with 2001 as it is seen as a year with well-functioning competition that validates this model. The year 2004 was chosen because it was the last year without emissions trading. In 2005 the EU emissions trading scheme started; this was accompanied by rising prices and “windfall profits” for electricity generating companies; 2006 was chosen because it supposedly suffered from “bad competition”. We test our results with the Lerner Index, but find that they do not necessarily confirm the exertion of market power.

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%.

Price spreads in electricity markets: What are fundamental drivers?

In this paper, we identify and analyze fundamental drivers on the base-peak spread of wholesale electricity prices. We set up scenarios for a model based analysis to test the influence of these drivers. An agent-based simulation approach is used to carry out this analysis. Results show that the gas-to-coal price difference is an essential factor for the development of the base-peak electricity price spread.

Impacts of volatile and uncertain renewable energy sources on the German electricity system

The paper quantifies the indirect system costs of renewable energy sources for the German electricity system with a model-based energy system analysis approach. The stochastic and volatile character of renewable energy sources and the market mechanisms used in Germany to compensate the forecast errors are considered. The results of the system analysis point out that the indirect system costs are currently quite small. However, the indirect system costs are increasing in coming years. Results show that photovoltaic has smaller indirect system costs than wind energy and photovoltaic reduces the costs of volatility which arise by using wind energy. In other words, model results indicate that several intermittent resources lead to a positive portfolio effect.

European electricity and emission market modeling — the design of emission allocation plans and its effects on investment planning

The introduction of emissions trading and the design of allocation plans have far-reaching implications on the development of the power plant mix, the CO2-emissions, and the power plant investments of energy utilities. Especially CO2- and electricity prices as well as the design of the allocation rules get more and more important for investment strategies of energy utilities. For this reason it is necessary to analyse the impacts of the Emission Trading Scheme on the future of power generation and investment decisions in power industry. For this purpose this paper shows some possibilities to analyse the impact of different allocation methods by using optimizing energy system models. Results show that the emission allocation scheme has a significant influence on power generation planning and power plant investments and with this on the evolution of CO2-emission and electricity market.

Security of Supply and Electricity Network Flows after a Phase-Out of Germany’s Nuclear Plants: Any Trouble Ahead?

This paper, which examines the impacts of phasing out nuclear power in Germany, is the first to include an analysis of energy supply security and critical line flows in both the German and Central European electricity networks. The technical-economic model of the European electricity market, ELMOD, is used to simulate alternative power plant dispatch, imports, exports, and network use for a representative winter day. The results suggest that the shutdown of Germany’s nuclear plants will result in higher net imports, especially from the Netherlands, Austria, and Poland, and that electricity generation from fossil fuels will increase slightly in Germany and in Central Europe. We find that no additional imports will come from nuclear plants since they are already fully utilized in the merit order, and that electricity prices will rise on average by a few Euros per MWh. We conclude that closing the seven nuclear power plants within the government’s moratorium will cause no significant supply security issues or network constraints and an eventual full phase-out seem to be possible due to the completion of several new conventional power plants now under construction. Finally, we suggest that a nuclear phase-out in Germany within the next 3-7 years will not undermine security of supply and network stability in Germany and Central Europe.

Impacts of plug-in electric vehicles on Germany's power plant portfolio - A model based approach

The expanding market for electric mobility and its associated increasing electricity demand will affect the long term development of the European energy system. This effect depends on various framework conditions, such as the emission trading system, coupling requirements with renewable energy supplies, load shifting potentials, load infrastructure and the European transmission grid. Thus electric mobility will affect the investment strategies of energy utilities. This paper analyses the framework for electric mobility in Germany and introduces a model approach for an impact analysis of electric mobility on the European energy system based on an optimising energy system model. The electricity demand and load curve for electric mobility are derived and first results confirm the necessity for a European model approach in contrast to a national one in order to analyse these effects. Furthermore, results indicate that beside the market penetration, mainly the flexibility of charging intervals influences the impact of electric mobility on the energy system.

Future power markets

In this article we discuss the impact of the increasingly higher dynamics and transparency on future electricity markets due to a higher degree of automation along the energy supply chain. As part of the SESAM (Self Organization and Spontaneity in Liberalized and Harmonized Markets) project, we analyze the consequences of the customers’ higher willingness to change their supplier. In addition, we evaluate the major changes in load profiles caused by the use of load management systems in combination with dynamic retail electricity prices. We demonstrate that not only the consumer load but also the application of decentralized combined heat and power plants can be rescheduled. Finally, we outline further research activities.

Design of Emission Allocation Plans and Their Effects on Production and Investment Planning in the Electricity Sector

The introduction of emissions trading and the design of allocation plans have far-reaching implications on the development of the power plant mix, on CO2-emissions and the power plant investments of energy utilities. In particular CO2- and electricity prices as well as the design of the allocation rules are becoming increasingly important for the investment strategies of energy utilities.