Uncertainty in the Electric Power Industry: Methods and Models for Decision Support

311 Pages·2005·8.203 MB·English

by  Christoph Weber (auth.)

UNCERTAINTY IN THE
ELECTRIC POWER INDUSTRY
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UNCERTAINTY IN THE
ELECTRIC POWER INDUSTRY
Methods and Models for
Decision Support
CHRISTOPH WEBER
University of Stuttgart, Institute for Energy Economics and
Rational of Use of Energy
Christoph Weber
Institut for Energy, Economics and Rational Use of Energy
University of Stuttgart, Germany
Library of Congress Cataloging-in-Publication Data
Weber, Christoph.
Uncertainty in the electric power industry : methods and models for decision support /
Christoph Weber.
p. cm. – (International series in operations research & management science; 77)
Includes bibliographical research and index.
ISBN 0-387-23047-5 – ISBN 0-387-23048-3 (e-book)
1. Electric utilities. 2. Electric utilities—Deregulation. 3. Electric utilities—Planning. I.
Title. II. Series.
HD9685.A2W43 2004
333.793’23—dc22
2004057600
© 2005 Springer Science+Business Media, Inc.
All rights reserved. This work may not be translated or copied in whole or in part without
the written permission of the publisher (Springer Science+Business Media, Inc., 233 Spring
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The use in this publication of trade names, trademarks, service marks and similar terms,
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whether or not they are subject to proprietary rights.
Printed in the United States of America.
9 8 7 6 5 4 3 2 1 SPIN 11052869
springeronline.com
For Dorothee,
Simon and Miriam
Contents
VII
xi11
XIX
XXI
XXIII
Chapter 1
INTRODUCTION
Chapter 2
DEREGULATIOANN D MARKETS IN THE ELECTRICITY INDUSTRY 3
1. Status of deregulation ...................................................................4
2. Power and related markets in continental Europe ........................ 8
Chapter 3
DECISIONM AKING AND UNCERTAINTIES IN THE ELECTRICITY
INDUSTRY 11
1. Decision problems in the electricity industry ............................. 11
2. Uncertainties in the electricity industry ...................................... 13
2.1 Market prices for primary energy carriers ............................ 13
2.2 Product prices for electricity ................................................ 15
2.3 Availability of plants ............................................................ 18
2.4 Behavior of competitors ....................................................... 18
2.5 Demand growth .................................................................... 19
2.6 Technology development .. . . . . . . .. . .. . . .... . .... . . .. . . . . .. . . . . .. . . . .. . . . .. 1 9
2.7 Regulatory and political uncertainties .................................. 21
viii
3 . Formal framework .....................................................................2. 2
3.1 Formulating decision problems under uncertainty ...............2 2
3.2 Describing uncertain parameters ..........................................2 4
3.2.1 Random variables 24
3.2.2 Stochastic processes 26
3.3 Models for decision support under uncertainty ....................2 6
3.4 Measuring model quality .....................................................2. 7
Chapter 4
MODELLINEGL ECTRICITPYR ICES 3 1
1. Fundamental models ..................................................................3.2
1.1 Basic model: cost minimization under load constraint and
merit order ...........................................................................3. 2
1.2 Transmission constraints ....................................................3..5
1.3 Hydro plants .........................................................................3. 5
1.4 Start-up costs and minimum operationtshut-down time ....... 37
1.5 Reserve power markets .......................................................3..8
1.6 Implications and challenges .................................................3. 9
2 . Finance and econometric models ..............................................4..0
2.1 Basic models .......................................................................4..0
2.1.1 Geometric Brownian motion 40
2.1.2 Mean-Reversion models 42
2.1.3 Jump-Diffusion models 43
2.2 Deterministic and cyclical effects .........................................4 4
2.3 Advanced stochastic models ................................................4. 5
2.3.1 ARMA models 45
2.3.2 GARCH models 46
2.3.3 Mixture distributions 48
2.3.4 Markov regime switching 50
2.3.5 Transformed diffusion model 53
2.3.6 Multifactor models 54
3 . Integrated modeling approach ....................................................5. 6
3.1 Primary energy prices: stochastic model .............................5. 7
3.2 Electricity prices: fundamental model .................................6. 0
3.3 Electricity prices: stochastic model ......................................6 5
4 . Application ...............................................................................7.3..
Chapter 5
MODELINGCO MPETITION IN THE ELECTRICITY INDUSTRY 7 9
1 . Competition on the wholesale market: Cournot-Nash
competition and competition with bid curves .............................7 9
2 . Competition on the retail market: Bertrand competition and
competition with heterogeneous products ...................................8 0
Detailed Contents
Methodological approach basic model with one retail
.
market ................................................................................. 81
2.2 Methodological approach .ex tension to several retail
segments ............................................................................... 85
2.3 Analytical results .at tractiveness of various market
segments ...............................................................................8 7
3 . Application. ................................................................................. 90
3.1 Market description ................................................................9 0
..................................................................................
3.2 Results 93
Chapter 6
OPTIMIZINGG ENERATION AND TRADING PORTFOLIOS 97
1. Technical elements for production scheduling ...........................9 8
1.1 Fuel consumption and capacity restrictions for
conventional power plants and boilers ..................................9 9
1.2 Start-up, shut-down and ramping constraints .....................1 01
.............................................
1.3 Back-pressure steam turbines 103
1.4 Extraction condensing steam turbine .................................. 103
1.5 Gas turbine and gas motor .................................................1 05
2 . System-wide restrictions and objective function ......................1 06
2.1 Balance of supply and demand ..........................................1. 06
2.2 Objective function ..............................................................1 08
2.3 Problem structure and possible simplifications ..................1 10
3 . Separable optimization with uncertain prices - real option
model ......................................................................................1. 14
3.1 Basic models .......................................................................1 14
3.2 Thermal power plants as path-dependent American
options ...............................................................................1. 16
3.2.1 Model of Tseng and Barz 116
3.2.2 Use of lattices generated from Monte-Carlo
simulations 121
3.2.3 Adaptation to day-ahead-trading markets 124
4 . Two-stage optimization problem in day-ahead markets
including CHP ...........................................................................1 26
5. Longer-term portfolio management ........................................1 2 8
6 . Application. ..............................................................................1. 35
6.1 Portfolio description ........................................................... 135
6.1.1 Thermal power plants without cogeneration 135
6.1.2 Cogeneration system 136
........................................................
6.2 Real options approach -137
. . .
...................................................
6.3 Two stage optimization 141
6.4 Longer Term Portfolio Management .................................1. 43
Chapter 7
RISKM ANAGEMENT AND RISKC ONTROLLING 149
I . Typology of risks .....................................................................1 50
1.1 Market risks ........................................................................1 50
1.2 Other external risks ......................................................... 1 5 1
1.3 Internal risks .......................................................................1 52
2 . Aggregate risk measures ...........................................................1 52
2.1 Value at risk ......................................................................1. 52
2.2 Alternative concepts for market risk ...................................1 54
2.3 Alternative statistical risk measures ..................................1. 55
2.4 Integral earnings at risk .....................................................1. 56
3 . Integral earnings at risk and risk management strategies in
incomplete electricity markets .................................................1 58
4 . Price models for risk controlling .............................................1 6 6
4.1 Multivariate GARCH models ............................................1 69
4.2 Multivariate models with regime switching .......................1 72
5 . Power plant models for risk quantification ...............................1 78
5.1 Delivery risk - including analytical model for CHP
valuation ............................................................................1. 78
5.2 Short-term risk ..................................................................1. 81
6 . Application ................................................................................1 85
6.1 Computation methodology .................................................1 85
6.2 Portfolio description ...........................................................1 86
6.3 Results ................................................................................1 86
6.3.1 Delivery risk 187
6.3.2 Short-term risk 191
6.3.3 Integral earnings at risk 193
Chapter 8
TECHNOLOGAYS SESSMEN.TW ITH APPLICATION TO FUEL CELLS 195
1. Analysis of the state of the art ................................................... 196
2 . Technology developments in the middle and longer term ........ 199
2.1 Upscaling and hybrid systems ............................................ 199
2.2 Use of solid hels ...............................................................2. 02
2.3 Multistage system concepts ................................................2 03
3 . Cost development. .....................................................................2 04
3.1 Learning and experience curves - conceptual basis ...........2 04
3.2 Experience curves as a forecasting tool ..............................2 07
3.3 Dependency of the experience curves on the development
stage ...................................................................................2. 08
3.4 Ex-post observations of cost reductions for stationary fuel
cell systems .........................................................................2 09
Detailed Contents
Projection of experience curves for different technology
lines ... .. . .. .... .. .. .. .. .. .. .. .. .. .. .. . . .. . . . . . . . . . . . . . . . . . . . . 2 11
4. Assessment of context factors and resulting technology
potentials ..................................................................................2. 13
4.1 Energy demand structure ... .... .. . .. .. .. .. .. .. .. .. .. .. .. .. .. .. . . . .. . . .. .. ...2 14
4.2 Operation simulation .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 16
4.2.1 Principles of operation simulation 217
4.2.2 Aggregated utilization potentials in Baden-
Wiirttemberg 222
4.2.3 Sensitivity analyses 225
5. Identifying technology strategies ............................................2..2 6
Chapter 9
INVESTMENTD ECISIONS 229
1. Static, deterministic long-term market equilibrium - the
concept of peak load pricing .... .. . .. . ... . .. . . ... .. . . . .. . . .. .. .. .. .. . . . . . 2 1
2. Stochastic fluctuations in the electric load ................................2 35
3. Stochastic fluctuations in the primary energy prices ................2 42
4. Dynamic stochastic long-term price equilibria - a backward
induction approach.. .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . 245
,
4.1 Basic problem .. . . .. .. ...... .. .. .. .. ... .. . . . .. . . . ... .. . .. .. . .. .. .. .. .. .. .. .. .. .. .. .246
4.2 Two-stage example .. .. .. .. .. ... .. .. .. .. .. .. .. .. .. .. .. .. .. . .. . .. . . . .. . . .. .. .. .. .248
4.3 General solution approach .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 255
5. Application... . .. .. .. ... .. .. .. .. . ... ... ........ ... ..... .. .... .. .. .. .. .. .. .. .. .. .. .. .. .. .. .259
5.1 Case study analyzed... . .. .. .. .. .. .. .. ... .. .. .. .. .. .. .. .. ... .. . . .. .. .. .. .. .. .. ..260
5.2 Results ..... . .. . . ... .. . .... .. .. .. .. .. . . .. .. .. .. .... .. .. .. .. ... .. .. .. .. .. .. .. .. .. .. .. .265
, ,
Chapter 10
FINALR EMARKS
REFERENCES
INDEX