Effects of risk aversion on market outcomes: A stochastic two-stage equilibrium model

Abstract

This paper evaluates how different risk preferences of electricity producers alter the market-clearing outcomes. Toward this goal, we propose a stochastic equilibrium model for electricity markets with two settlements, i.e., day-ahead and balancing, in which a number of conventional and stochastic renewable (e.g., wind power) producers compete. We assume that all producers are price-taking and can be risk-averse, while loads are inelastic to price. Renewable power production is the only source of uncertainty considered. The risk of profit variability of each producer is incorporated into the model using the conditional value-at-risk (CVaR) metric. The proposed equilibrium model consists of several risk-constrained profit maximization problems (one per producer), several curtailment cost minimization problems (one per load), and power balance constraints. Each optimization problem is then replaced by its optimality conditions, resulting in a mixed complementarity problem. Numerical results from a case study based on the IEEE one-area reliability test system are derived and discussed.