Title: Conditional value-at-risk constrained optimisation of a power portfolio

Authors: Cigdem Z. Gurgur, Emily K. Newes

Addresses: Doermer School of Business, Indiana – Purdue University, 2101 East Coliseum Blvd., Fort Wayne, IN 46805, USA. ' Primary Research Department, Platts Analytics, 10225 Westmoor Drive, Westminster, CO 80021, USA

Abstract: The deregulation of electricity markets is introducing risk and uncertainty into a sector of the economy that was traditionally state-regulated. In order to manage risk from market prices, consumers and producers use financial methods to support decentralised decision making under uncertainty. In this research, optimisation of portfolios of real and contractual assets is considered in a multi-period setting that includes transmission constraints. Fixed transmission rights are used as a measure of transmission congestion using data from the PJM Interconnection, a regional transmission organisation in the USA. The results show that transmission considerations in a power portfolio optimisation problem do have an impact on the profit function. Omitting transmission congestion may over-state expected profit. Companies should not only hedge the risk of unknown power prices but also unknown transmission congestion.

Keywords: constrained optimisation; power generation; transmission congestion; simulation; conditional value-at-risk; CVaR; VaR; stochastic modelling; nonlinear mixed-integer modelling; deregulation; electricity markets; transmission constraints.

DOI: 10.1504/IJADS.2011.040880

International Journal of Applied Decision Sciences, 2011 Vol.4 No.3, pp.230 - 246

Published online: 29 Sep 2014 *

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