Stochastic modeling of the long-term dynamics of liberalized electricity markets

Abstract

Currently, long-term prices and long-term supply reliability are topics of considerable interest for both, firms investing in generation capacity and regulatory authorities. In order to gain insight into the long-term behavior of liberalized power markets, a simulation model based on system dynamics (SD) is proposed. It is shown that the long-term market dynamics can be represented by a balancing feedback loop. Stochastic simulations on an exemplary thermal system are performed. Results suggest that there might be serious problems to adjust early enough the generation capacity to maintain secure reserve margins, and consequently, stable long-term price levels. Because of the existence of time lags in the market balancing feedback loop, the long-term market development might exhibit a quite volatile behavior. By applying stochastic simulation techniques, the ability of the developed SD model for describing the long-term market uncertainty is demonstrated.