Mariano Ventosa

Modeling competition in electric energy markets by equilibrium constraints

Abstract Throughout the world, the electricity industry is currently undergoing significant restructuring towards deregulation and competition. Under this new framework, electric firms assume more risk, and are more responsible for their own decisions. Utilities need original models that fulfil these new requirements. This paper presents a novel conceptual approach to modeling the newly deregulated power markets. It combines powerful traditional tools related to the detailed system operation with techniques for modeling economic market equilibria. The proposed approach models the competitive behavior of the electric firms by incorporating a set of constraints, namely the equilibrium constraints, into a traditional production cost model. These constraints reproduce the first order optimality conditions of the strategic companies. Thus the approach achieves a profit maximization objective while keeping the system operation details. This model has been implemented in GAMS. An application to a sample case study is also presented.

Incorporating oligopoly, CO2 emissions trading and green certificates into a power generation expansion model

This paper presents a generation expansion model for the power sector which incorporates several features that make it very interesting for application to current electricity markets: it considers the possible oligopolistic behavior of firms, and incorporates relevant policy instruments, carbon emissions trading and tradable green certificates. It combines powerful traditional tools related to the detailed system operation with techniques for modeling the economic market equilibrium and a formulation for the resolution of the emissions permit and tradable green certificates market equilibrium. The model is formulated as a Linear Complementarity Problem (LCP) which allows the optimization problem for each firm considering the power, carbon and green certificate markets to be solved simultaneously. The model has been implemented in GAMS. An application to the Spanish power system is also presented.

A medium-term integrated risk management model for a hydrothermal generation company

This paper presents a methodology to manage the market risk faced by a hydrothermal generation company in the medium-term (one year). This risk is due to uncertainty in fuel prices, power demand, water inflows, and electricity prices. The proposed methodology includes three steps: the generation of scenarios for these random parameters, the approximation of these scenarios by a multivariate scenario tree, and the optimization of the companys operational and financial hedging decisions under a stochastic programming framework. The optimization model permits the representation of a diversified generation portfolio and measures risk exposure by means of conditional value-at-risk. A realistic numerical example is solved to illustrate the possibilities of our approach.

Coordination of carbon reduction and renewable energy support policies

The European Union is currently pursuing ambitious objectives regarding carbon emissions reductions and renewable energy deployment (renewable energy support, RES), as part of a comprehensive energy policy effort. However, significant interactions may arise between the policy instruments used (Emissions Trading Scheme and RES-specific measures), such as double-counting incentives or geographical overlapping. This article examines these interactions using analytical and simulation research and offers some policy recommendations. The major conclusions are that both instruments are required in order to meet the objectives, and that their use in combination may be advantageous regarding consumer costs. However, they must be carefully coordinated, since part of the carbon allowance price may be incorporated into the RES certificate price. This will produce a reduction in the strength of the emissions reduction signal, and also a different distribution of the cost of the policies. In addition, each policy needs to focus at the geographical level appropriate for its objectives (carbon and security of supply policies at the regional level, and RES-induced local development at the national level).

A Generation Operation Planning Model in Deregulated Electricity Markets Based on the Complementarity Problem

Throughout the world, the electricity industry is currently undergoing a significant restructuring process toward deregulation and competition. In the new deregulated power markets, electric firms assume much more risk and become highly responsible for their own decisions, and therefore they need decision-support models that fulfill their new requirements. This paper proposes a new approach for long-term operation-planning models, fully adapted to represent an annual or hyperannual power generation scheduling in a competitive framework. The method explicitly states the Cournot market equilibrium by analytically formulating the equations defining the optimal behavior of any strategic generation company. The technical constraints relevant to the time scope studied are also taken into account. The subsequent system of non-linear equations has the structure of a Complementarity Problem and can be solved directly. The model includes a technologically detailed representation of the generation firms, the treatment of hydro operations and of non-linear cost functions. A detailed case study illustrates how this model works, and how different generation technologies are optimally operated. An application to the Spanish electric market is also briefly presented in order to show that the model is also able to deal with large-scale electric systems.

An MCP approach for hydrothermal coordination in deregulated power markets

This paper proposes a new methodology for addressing the long term operation planning of a generation company, fully adapted to represent both its annual and hyperannual hydrothermal power generation scheduling in a competitive market. The method explicitly states the electricity generation market equilibrium by analytically formulating the equations that express the optimal behavior of the existing generation companies, considering the technical constraints that affect the scheduling of their units. The subsequent system of nonlinear equations can be directly solved taking advantage of its mixed complementarity problem (MCP) structure, which allows for the use of special complementarity methods. A hydrothermal coordination model based on the proposed methodology has been developed and implemented in GAMS. A case study is also presented to show its successful application to the large-scale Spanish electric power system.

Modeling Risk Management in Oligopolistic Electricity Markets: A Benders Decomposition Approach

This paper presents a model for addressing the market risk management problem faced by a hydrothermal generation company trading in an oligopolistic market. The risk is due to uncertainty in fuel prices, power demand, water inflows, and electricity prices. The model permits the representation of a diversified generation portfolio and measures risk exposure by means of conditional value at risk. The model is formulated and solved as a stochastic linear complementarity problem. In order to deal with realistically sized problems, Benders decomposition technique is adapted to solve equilibrium models. A numerical example illustrates the possibilities of the algorithm we propose.

Strategic bidding in a competitive electricity market: a decomposition approach

Daily bidding is an activity of paramount importance for generation companies operating in day-ahead electricity markets. The authors have developed a strategic bidding procedure based on stochastic programming to obtain optimal bids. In this paper, the problem is decomposed under the Benders framework to permit the solution of large-size problems. A numerical example illustrates the advantages of the proposed approach.

Strategic Unit Commitment for Generation in Deregulated Electricity Markets

In this chapter we address some of the new short-term problems that are faced by a generation company in a deregulated electricity market, and we propose a decision procedure to address them. Additionally, we propose a strategic unit commitment model, which deals with the weekly operation of the firm’s generating facilities. In it we combine traditional cost-evaluation techniques and technical constraints that grant a feasible schedule with new market-modeling equations. We suggest strategic constraints that allow the accomplishment of the firm’s medium-term objectives. We have formulated the model as a mixed-integer-programming problem and solved it by means of a commercial algorithm, instead of using the traditional Lagrangian relaxation approach. Results of the application of the method to a numerical example are presented. The procedure is a simplified version of one of several tools currently being used by a leading Spanish generation company, Iberdrola, for the weekly operation of its generation assets in the Spanish wholesale electricity market.

Strategies to fulfill medium-term objectives through short-term operation in competitive power markets

This work presents two different approaches in order to guarantee that short-term decisions made by a generation company taking part in a wholesale electricity market are consistent with its operation objectives formulated from a medium-term perspective. In particular, it shows how certain economic signals must be used so as to orient short-term decisions toward medium-term objectives. The paper focuses in the case of a generation company that establishes a minimum-market-share objective for the medium term, and shows the implications of the different guidelines that can be used in the short-term operation in order to achieve that objective.