724. Mitigating market incompleteness with little market distortions: the case of negative spot prices for electricity
Invited abstract in session WA-44: Forecasting methods and electricity markets, stream Energy Economics & Management.
Wednesday, 8:30-10:00Room: Newlyn 1.01
Authors (first author is the speaker)
| 1. | Ibrahim Abada
|
| 2. | Andreas Ehrenmann
|
| GDF SUEZ |
Abstract
Risk-mitigation instruments are essential to foster investments in electricity production assets and their role is all the more important in the case of market incompleteness. At the same time, such instruments may induce distortions of competition limiting spot markets' effectiveness. An example of such an effect is the dramatic increase of negative spot prices observed in power markets. Such distortions have been so far overlooked in most quantitative research dedicated to market incompleteness, which, most of the time assumes that agents are perfectly competitive. This paper proposes a framework to integrate market distortions when analyzing incompleteness using a bi-level programming approach. The lower level models the power economy via the now standard equilibrium formulation of the two-stage investment problem under risk aversion. A central planner, acting on behalf of consumers, offers a set of risk-mitigation schemes in the form of Contracts for Difference and price markups to foster investments but these can distort competitive bidding of producers. In the upper level, the central planner best tunes the design of contracts so that social welfare is maximized. We provide an existence result and undertake a thorough numerical simulation inspired by the French power system, which demonstrates the potential of best tuning the risk-mitigation instruments offered to electricity producers to enhance welfare and limit the prevalence of negative prices.
Keywords
- Energy Policy and Planning
- Risk Analysis and Management
- Game Theory
Status: accepted
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