Electricity Markets under Uncertainty

Abstract

In the ideal world, electricity markets are solved under the assumption that all quantities are deterministic. This is the equivalent of assuming that one can perfectly predict future levels of demand and supply. In the real world, the biggest source of uncertainty comes precisely from demand and supply levels. A clear understanding of the economical implications of randomness from supply and demand in electricity markets is still lacking. Random variations of any kind introduce risk. Therefore, one would be interested in somehow minimizing the risk when solving an electricity market. This paper explains the economical implications of minimizing the risk introduced by supply and demand uncertainties. The risk minimization technique used in this work is based on the well known mean-variance Markowitz theory.