Equilibrium Model Of Electricity Market Research Articles

Impact of Contracts for Differences for non-carbon electricity generation on efficiency of electricity market

In response to the recent energy crisis, the European Commission proposed two-way Contracts for Differences (CfDs) to secure renewable energy investments and protect consumers. The proposed CfDs, however, raised concerns regarding the potential impact on electricity prices. This study examines the effects of various CfD design elements on day-ahead electricity prices, welfare, and renewable energy production. Using a partial equilibrium model of an international electricity market including thirteen European countries, we find a trade-off between stimulating renewable electricity producers to respond to negative prices, and ensuring producer certainty. We also show potential market distortions for CfDs with longer-term reference prices, particularly when strike prices deviate from expectations. Additionally, our study underscores the interactions among various players in the electricity market, in particular storage operators and international traders, and how these interactions can mitigate potential distortions from CfDs. Therefore, policymakers should carefully consider the design elements of CfDs, and weigh the promotion of renewable energy production against the efficiency of markets. Moreover, a proper reference price should be selected, to avoid further increasing electricity prices in periods with high electricity prices.

Tseng-type splitting projection algorithms for equilibrium problems in Hilbert spaces

In this work, based on the subgradient-type projection method considered by Santos and Scheimberg (Optimization, 2017), we propose some Tseng-type splitting algorithms for solving equilibrium problems whose bifunction is decomposed into the sum of two bifunctions in Hilbert spaces. We establish the weak and strong convergence of the proposed algorithm under standard assumptions. Numerical results in Nash–Cournot oligopolistic electricity market equilibrium model and comparisons with other related methods demonstrate the effectiveness of the proposed algorithm.

Implications of Growing Wind and Solar Penetration in Retail Electricity Markets with Gradual Demand Response

Time-of-use pricing in retail electricity markets implies that wholesale market scarcity becomes easily communicated to end consumers. Yet, it is not well-understood if and how the price formation process in retail electricity markets will help to reward the demand for operational flexibility due to growth in intermittent generation. To contribute to this discussion, this paper develops a partial equilibrium model of the retail electricity market calibrated to Chinese data. The paper finds that tariffs in this market may not be significantly suppressed by growth in near-zero costs renewable sources when controlling for flexibility restrictions on thermal generation assets and when a significant curtailment of variable renewable resources exists in the market. In addition, it shows that the price formation process in retail electricity markets which controls for flexibility restrictions on thermal generation while allowing for consumers to respond slowly to price changes is a feasible strategy to reward the demand for operational flexibility. Finally, the paper reveals that while integrating intermittent generation beyond levels which the available storage capacities can accommodate may result in losses to producers, benefits to consumers may offset these losses, leading to overall welfare gains.

Can renewable energy portfolio standards and carbon tax policies promote carbon emission reduction in China's power industry?

The carbon emissions of the power industry in China rank the highest among all industries. There is an urgent need to explore the development path of the power industry under carbon peaking and carbon neutrality. Renewable portfolio standards (RPS) and carbon tax policy are effective policy instruments for realizing the low-carbon transition in the power industry. When both RPS and carbon tax policy are implemented, can they drive carbon reduction in the power industry? This paper constructs an electricity market equilibrium model and a system dynamics (SD) model to analyse the impact of multiple policies in electricity markets to address this question. There were several important results. (1) The increase in quota ratio and carbon tax price negatively impacts the generation of thermal power firms, which raises their willingness to invest in renewable energy. (2) The intensity of emissions reduction has a significant influence on the effectiveness of emissions reduction. The greater the emissions reduction intensity, the better the carbon emissions reduction effect, but the power supply declines. (3) Under multiple policies, green power firms choose cost padding to achieve profit maximization goals, which reduces green power generation and leads to market inefficiency.

An equilibrium model of the electricity market considering the participation of virtual power plants

Led by the carbon peak and neutrality targets, there is a consensus for renewable energy to compete in the electricity market alongside conventional energy sources. Based on co-evolutionary algorithms, this paper proposes an equilibrium model of electricity market with the participation of virtual power plants composed of wind farms and distributed energy storage. The model constructs a secondary clearing mechanism with the aim of promoting hydropower consumption and simulates the game behavior of various players in a market environment from the perspective of power producers. A co-evolutionary algorithm is used to solve the market equilibrium point for the game model, and the optimal fitness function is used to judge whether the generator’s strategy combination is optimal. The simulation results validate the effectiveness of the market model and the co-evolutionary algorithm. The results show that the secondary clearance mechanism is effective in increasing the rate of wind power consumption and improving the overall welfare of society.

THE DISTRIBUTIONAL EFFECT OF INTER-REGIONAL TRANSMISSION GRID EXPANSION ON CHINA’S POWER INDUSTRY

China suffers significant heterogeneities in resource endowments and geological conditions across the regions. Ultra-high voltage (UHV) line construction is a project put forward by the government to boost the inter-regional transmission grid expansion, benefiting economic development by reducing pollutant emissions and absorbing more clean energy. This study investigates the extent to which this giant infrastructure has distributional effects on China’s power industry. We estimate the distributional effect of UHV lines from the perspective of power deployment, carbon emissions, and producer surplus by simulating an equilibrium model of the national electricity market through the mixed complementarity problems (MCPs) method. Furthermore, the Lorenz curve is also employed to investigate the distributional effect of UHV introduction. The results indicate that: (1) the distributional effect of introducing UHV lines is regressive considering its limited contributions to the equalization of environmental and economic welfare; (2) the emission reduction effect of the UHV lines has been improved between 2015 and 2018; (3) power plants with a large installation capacity could seek more economic profits while emitting more pollution; (4) the deployment of clean power in the resource-abundant regions is far below its potential. Meanwhile, we propose improving the structure and technology of the power mix, which can accelerate China’s market-oriented reform of the power system by equally distributing the benefits.

Information shocks and profitability risks for power plant investments – impacts of policy instruments

Climate change mitigation requires governmental intervention and there are various measures that can achieve this. While economists generally advocate first-best instruments, the reality is rather different, as subsidy schemes are commonly used for supporting renewable energy sources. The supporters of these schemes often argue that investment risk reduction is essential to achieving ambitious environmental targets. In this paper, we compare four different instruments (carbon cap, carbon tax, minimum renewable quota, and feed-in tariffs / renewable auctions) in terms of effectiveness, efficiency, and mitigation of investment risks. Risks are assessed assuming an uncertain investment environment, represented by different information shocks on demand, investment, and fuel cost. We employ an electricity market equilibrium model (generalized peak load pricing model) of the future German electricity market implemented as a linear optimization problem. Beginning from a long-run equilibrium, single input parameters such as demand, fuel prices, and investment costs are varied to simulate the arrival of new information. Rerunning the model with partially fixed capacities enables us to analyze the sequential adjustment of the power generation portfolio toward a new equilibrium over time. As expected, we find that quantity-based instruments are effective in ensuring the achievement of quantitative goals—notably a certain emission level. However, risks for investors are rather high in such cases. While our analyses confirm that the first-best instruments—carbon cap and carbon tax—provide the most efficient trade-off between emission reduction and cost, we also establish that investment risks are lower with price-based mechanisms. Particularly feed-in tariffs / renewable auctions provide the possibility of substantially limiting risks by diversification even when only electricity market assets are considered.

An inertial subgradient extragradient algorithm extended to pseudomonotone equilibrium problems

The paper introduces an inertial extragradient subgradient method with self-adaptive step sizes for solving equilibrium problems in real Hilbert spaces. Weak convergence of the proposed method is obtained under the condition that the bifunction is pseudomonotone and Lipchitz continuous. Linear convergence is also given when the bifunction is strongly pseudomonotone and Lipchitz continuous. Numerical implementations and comparisons with other related inertial methods are given using test problems including a real-world application to Nash–Cournot oligopolistic electricity market equilibrium model.

Buffering volatility: Storage investments and technology-specific renewable energy support

Mitigating climate change will require integrating large amounts of highly intermittent renewable energy (RE) sources in future electricity markets. Considerable uncertainties exist about the cost and availability of future large-scale storage to alleviate the potential mismatch between demand and supply. This paper examines the suitability of regulatory (public policy) mechanisms for coping with the volatility induced by intermittent RE sources, using a numerical equilibrium model of a future wholesale electricity market. We find that the optimal RE subsidies are technology-specific reflecting the heterogeneous value for system integration. Differentiated RE subsidies reduce the curtailment of excess production, thereby preventing costly investments in energy storage. Using a simple cost-benefit framework, we show that a smart design of RE support policies significantly reduces the level of optimal storage. We further find that the marginal benefits of storage rapidly decrease for short-term (intra-day) storage and are small for long-term (seasonal) storage independent of the storage level. This suggests that storage is not likely to be the limiting factor for decarbonizing the electricity sector.

Buffering Volatility: Storage Investments and Technology-Specific Renewable Energy Support

Mitigating climate change will require integrating large amounts of highly intermittent renewable energy (RE) sources in future electricity markets. Considerable uncertainties exist about the cost and availability of future large-scale storage to alleviate the potential mismatch between demand and supply. This paper examines the suitability of regulatory (public policy) mechanisms for coping with the volatility induced by intermittent RE sources, using a numerical equilibrium model of a future wholesale electricity market. We find that the optimal RE subsidies are technology-specific reflecting the heterogeneous value for system integration. Differentiated RE subsidies reduce the curtailment of excess production, thereby preventing costly investments in energy storage. Using a simple cost-benefit framework, we show that a “smart” design of RE support policies significantly reduces the level of optimal storage. We further find that the marginal benefits of storage rapidly decrease for short-term (intra-day) storage and are small for long-term (seasonal) storage independent of the storage level. This suggests that storage is not likely to be the limiting factor for decarbonizing the electricity sector.

Information Shocks and Profitability Risks for Power Plant Investments – Impacts of Policy Instruments

Climate change mitigation requires governmental intervention, but different choices are at hand. While economists in general advocate for first-best instruments, reality looks quite different, with especially many subsidy schemes for renewable energies being used. Supporters of these schemes often argue that investment risk reduction is essential to achieve ambitious environmental targets. In this paper we compare four different instruments (cap, tax, minimum quota and feed-in tariffs/renewable auctions) in terms of efficacy and efficiency and also quantify investment risks, assuming an uncertain investment environment, represented by different information shocks on demand, investment and fuel cost. We use a long-term electricity market equilibrium model (generalized peak load pricing model) of the future German electricity market implemented as a linear optimization problem. Starting from an equilibrium, single input parameters are varied to simulate the arrival of new information. Running the model again with partly fixed capacities then allows us to analyze the adjustment of the power plant portfolio towards the new equilibrium over time. As expected quantity-based instruments are effective in assuring achievement of quantitative goals, notably a certain emission level. Yet risks for investors are rather high in that furthermore that first-best instruments are the most efficient. Risks are lower with price solutions, especially feed-in tariffs or renewable auctions provide the possibility to limit risks extremely by diversification only inside the electricity market.

Two-stage joint equilibrium model of electricity market with tradable green certificates

Renewable portfolio standard (RPS) with tradable green certificate (TGC) scheme has important influences on the market equilibrium outcomes and generation firms’ strategic behaviors. The main objective of this paper is to investigate that under the RPS with TGC scheme, who and how to exercise the market power, and to what extent market powers are exercised in the electricity wholesale and TGC markets. This is achieved by firstly proposing a two-stage joint equilibrium model based on the oligopolistic competition equilibrium theory. The model is then formulated as an equilibrium problem with equilibrium constraints (EPEC) by using the backward induction method, which is further solved by the nonlinear complementarity approach. Finally, simulation results show that renewable firms tend to withhold some of TGCs to raise the TGC prices when the RPS is relatively low, otherwise they choose to cut down their electricity output to reduce the volume of TGC and raise the TGC price. Moreover, facing the increasing TGC price, fossil fuel firms tend to withhold their electricity output to decrease the demand of TGCs and lower the TGC price. This study has meaningful implications for design of the electricity markets with TGC market.

A game equilibrium model of a retail electricity market with high penetration of small and mid-size renewable suppliers

Game theory has provided a practical tool to model players' strategic behavior in electricity markets, particularly as the world moves towards a more competitive market. A game theoretic approach can be used to find the clearing electricity price in a retail electricity market with a high penetration of small and mid-size renewable suppliers.

Renewable Energy Support in Germany: Surcharge Development and the Impact of a Decentralized Capacity Mechanism

The German support for renewable energies in the electricity sector is based on the feed-in tariff for investors that grants guaranteed revenues for their renewable energy supply. Corresponding to differences of granted tariffs and respective market values, a surcharge on consumption covers differential costs. While granted tariffs are bound to fall with advances in renewable energy technologies, the market design and the flexibility of the system influence the expected market values of renewables and the necessary surcharge. We apply the European electricity market equilibrium model EMELIE-ESY to investigate this relationship. We find a crucial dependence of market values of renewables on a high system flexibility and the current so-called energy-only market design. Under these conditions, the market values of renewables sequentially recover with increasing market prices by 2024 and 2034. This allows to limit the increase of the core surcharge to below a quarter of its 2013 value by 2024 despite a doubling of renewables, and to introduce substantial surcharge reductions through 2034. However, the introduction of a capacity market would erode market values of renewable energies and induce a pronounced growth of the core surcharge. Under inflexible supply structures and a capacity market, we find an increase of the core surcharge of more than 50 percent by 2024, a respective loss of the market value of wind power of the same magnitude, and an increase of the generation induced part of the consumer prices of more than a quarter.

Asian options pricing in the day-ahead electricity market

The purpose of this paper is to show that by using the toolkit of interest rate theory, it is possible to evaluate option prices through an electricity market equilibrium model. Options represent an adequate instrument to manage price risk faced by electricity producers that are related to both pool price and unit availability uncertainty. We have priced path dependent put and call Asian options by using arithmetic average, verifying that the possibility of market agents to forecast the future demand contributes to the market efficiency making option price level lower.

Analysis of the effect of voltage level requirements on an electricity market equilibrium model

Abstract This paper presents a conjectural-variation-based equilibrium model of a single-price electricity market. The main characteristic of the model is that the market equilibrium equations incorporate the effect of the voltage constraints on the companies’ strategic behavior. A two-stage optimization model is used to solve the market equilibrium. In the first stage, an equivalent optimization problem is used to compute the day-ahead market clearing process. In the second stage, some generation units have to modify their active and reactive power in order to meet the technical constraints of the transmission network. These generation changes are determined by computing an AC optimal power flow.

Electricity Market Equilibrium Model with Seasonal Volatilities

In this paper we propose and implement an electricity market equilibrium model. The model, originally conceived by Hinz [8], is now set up by making use as input of the spot price pattern obtained with the term structure Heath Jarrow Morton [6] model, but we assume that price volatility is seasonal. The chosen volatility functional form captures the price return seasonality and consequently allows to support the production scheduling. We show as seasonality and electricity demand forecasting techniques make the study of energy forward price dynamics related to the demand and the provisional capacity of the agents.

The Impact of Imperfect Competition in Emission Permits Trading on Oligopolistic Electricity Markets

The impact and efficacy of a cap-and-trade regulation on the electric power industry depend on interactions of demand elasticity, transmission network, market structure, and strategic behavior of generation firms. This paper develops an equilibrium model of an oligopoly electricity market in conjunction with a Cap-and-Trade emissions permits market to study such interactions. The concept of conjectural variations is proposed to account for imperfect competition in the permits market. We demonstrate the model using a WECC 225-bus system with a detailed representation of the California market. In particular, we examine the extent to which permit trading strategies affect the market outcome. We find that a firm with more efficient technologies can employ strategic withholding of permits, which allows for its increase in output share in the electricity market at the expense of other less efficient firms.

Conjectural-Variation-Based Equilibrium Model of a Single-Price Electricity Market With a Counter-Trading Mechanism

This paper presents a new conjectural-variation-based equilibrium model of a single-price electricity market. In the electricity market, firstly, the market clearing process is performed in the day-ahead market and after that, a counter-trading mechanism is used to clear the network congestion. The system may have any configuration, either radial or meshed, and there is not restriction on the size of the system. The main contribution of the model is that the market equilibrium equations incorporates the effect of congestion between multiple areas in the agents' strategic behavior. Furthermore, the market equilibrium equations are solved using an equivalent optimization problem. The optimization problem has two levels. The first level corresponds to the day-ahead market and the second level is a DC optimal power flow that solves the network congestion. Numerical results are provided to illustrate the performance of the proposed approach.

A blocked takeover in the Polish power sector: A model-based analysis

As the President of the Office of Competition and Consumer Protection refused to approve a government initiated takeover in the Polish power sector and the Court of Competition and Consumer Protection did not make a ruling on that case, the takeover was finally prohibited. In this context, the main aim of this paper is to carry out a quantitative analysis of the impact of the takeover in question on electricity prices and quantities, consumer and producer surpluses, dead weight loss and emissions.The scope of the study covers the Polish power generation sector and the analysis was carried out for 2009. A game theory-based electricity market equilibrium model developed for Poland was applied. The model includes several country-specific conditions, such as a coal-based power generation fuel-mix, a large share of biomass co-combustion, etc. For the sake of clarity, only four scenarios are assumed.The paper concludes that the declared synergy savings did not compensate for the increase in dead weight loss and the transfer of surplus from consumers to producers caused by increased market power.