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An integrated theory of dispatch and hedging in wholesale electric power markets
Australian Competit & Consumer Commiss, Melbourne, Australia..ORCID iD: 0000-0002-3425-7264
KTH, School of Electrical Engineering and Computer Science (EECS), Electrical Engineering, Electric Power and Energy Systems.ORCID iD: 0000-0002-9998-9773
2022 (English)In: Energy Economics, ISSN 0140-9883, E-ISSN 1873-6181, Vol. 112, article id 106055Article in journal (Refereed) Published
Abstract [en]

The literature on optimal dispatch of wholesale power systems implicitly assumes that market participants are risk-neutral. But, in practice, most wholesale electricity market participants behave as though they are risk averse, seeking to insulate themselves from the market risks they face. In this context, achieving the overall social-welfare maximum requires simultaneously finding both the optimal dispatch and optimal hedging arrangements. Assuming that market participants have mean-variance preferences, we show that the dispatch task can be separated from the hedging task. We show how market participants can achieve a perfect hedge by forming a portfolio of inter-temporal hedge contracts. Departing from the previous literature, we assume the system operator is risk averse. We show how the system operator can achieve a perfect hedge using a portfolio of inter-nodal hedging instruments which we refer to as generalised Financial Transmission Rights. The total risk experienced by market participants when optimally hedged is equal to the variation in the total surplus or total economic welfare. This approach therefore leads naturally to a form of merchant transmission investment where network upgrade decisions are carried out by a coalition of risk-bearers in the market. In addition, we propose a natural extension in which transmission network operators provide a form of insurance against network outages, and face the correct social incentive for avoiding network outages. This approach resolves a number of outstanding issues in the economic analysis of power markets.

Place, publisher, year, edition, pages
Elsevier BV , 2022. Vol. 112, article id 106055
Keywords [en]
Economic dispatch, Perfect hedge, Generalised FTRs, Inter-nodal hedges, Merchant investment
National Category
Economics and Business
Identifiers
URN: urn:nbn:se:kth:diva-316022DOI: 10.1016/j.eneco.2022.106055ISI: 000827384800008Scopus ID: 2-s2.0-85133461326OAI: oai:DiVA.org:kth-316022DiVA, id: diva2:1686337
Note

QC 20220809

Available from: 2022-08-09 Created: 2022-08-09 Last updated: 2022-08-09Bibliographically approved

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Hesamzadeh, Mohammad Reza

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