A risk- and upside-aware contracting strategy methodology for renewable-composed generation companies

Abstract

With a massive penetration of renewable energy observed in the past years, appropriately adjusting its portfolio of contracts is critical for Generation Companies (GenCos). In this context, most decision-making methodologies have as a composition the expected reward and risk-measure functionals as a foundation. However, one point typically overlooked by this standard framework is the absence of an appropriate treatment of the financial upside. Therefore, this work presents an alternative decision-making framework to prescribe risk- and upside-aware forward-contracting strategies for renewable-composed GenCos. Structurally, for a given threshold level that partitions the cash-flow probability distribution function into upside and downside regions, an upside-adjusted-by-risk value functional is derived. The resulting portfolio allocation model falls within the class of a non-convex optimization problem, for which we also devise an efficient reformulation procedure to recast the methodology into a convex optimization problem. To illustrate the applicability and validate the efficiency of the proposed methodology, two case studies were conducted, comparing the proposed methodology with the standard “risk-reward” decision-making framework. Overall, we observed that the risk faced by the GenCo using the proposed methodology is slightly higher when compared to the standard “risk-reward” decision-making framework, but the upside level is non-negligibly higher. Therefore, the proposed portfolio allocation methodology efficiently accounts for the problem’s uncertain factors with an adequate balance between downside and upside levels.