From Systematic Risk to Systemic Risk: Analysis Over Day-Ahead Market Operation Under High Renewable Penetration by CoVaR and Marginal CoVaR

Abstract

Traditional power market risk studies focus on systematic risk analysis which relies on value-at-risk (VaR) or conditional value-at-risk (CVaR) to measure potential financial losses resulting from renewable generation uncertainties. However, systematic risk only reflects the risk of a single entity and cannot capture the systemic risk which measures the risk contribution from a market participant to the overall market or the risk connection between two different market participants. With the rapid integration of renewable energy resources, it is essentially important to identify which renewable assets contribute a higher risk to market operations. Therefore, we propose two systemic risk measures, Contagious VaR (CoVaR) and marginal CoVaR (ΔCoVaR), to construct the risk connection network of the energy market under high renewable penetrations. Then, based on ΔCoVaR, a new index called normalized ΔCoVaR is built for market operators to evaluate the per MW impact on ΔCoVaR. Further, this paper proposes two approaches to manage the systemic risk in a day-ahead (DA) market, depending on regulation purposes. Finally, the proposed risk measures and management methods are applied to analyze a DA market with over 30% renewable energy penetration in a modified IEEE 118-bus system.