Heterogeneous risk preferences in community-based electricity markets

Abstract

Organization in electricity markets is evolving from centralized pool-based to decentralized peer-to-peer structures. Within this decentralized framework, agents are expected to individually procure their energy, while directly negotiating with other market participants. Since distributed power generation is mostly based on non-dispatchable energy resources with zero marginal cost, any proposed decentralized negotiation mechanism needs to account for uncertainties. When operating uncertain assets, decision makers are affected by subjective attitudes towards uncertain payoffs, impacting not only their energy procurement but also the whole market equilibrium. We propose a new definition of fairness in risky environments and show that, in decentralized electricity markets, heterogeneous risk aversion of participants compromises fairness of the resulting market payments. Consequently, we introduce financial contracts as risk hedging mechanisms and evaluate their impact on market equilibrium and payments. We show that by trading financial products, fairness is restored.