Strategic generation investment using a stochastic rolling-horizon MPEC approach
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Strategic generation investment using a stochastic rolling‑horizon MPEC approach Thomas Kallabis1 · Steven A. Gabriel2,3 · Christoph Weber1 Received: 13 December 2019 / Accepted: 10 November 2020 © The Author(s) 2020
Abstract Investments in power generation assets are multi-year projects with high costs and multi-decade lifetimes. Since market circumstances can significantly change over time, investments into such assets are risky and require structured decisionsupport systems. Investment decisions and dispatch in electricity spot markets are connected, thus requiring anticipation of expected market outcomes. This strategic situation can be described as a bilevel optimization problem. At the upper level, an investor decides on investments while anticipating the market results. At the lower level, a market operator maximizes welfare given consumer demand and installed generation assets as well as producer price bids. In this paper, we formulate this problem as a mathematical program with equilibrium constraints (MPEC). We consider this model to include a dynamic, rolling-horizon optimization. This structure splits the investment process into multiple stages, allowing the modification of waitand-see decisions. This is a realistic representation of actors making their decision under imperfect information and has the advantage of allowing the players to adjust their data in between rolls. This more closely models real-world decision-making and allows for learning and other feedback in between rolls. The rolling-horizon formulation also has the beneficial byproduct of computational advantage over a fixedhorizon stochastic optimization formulation since smaller problems are solved and we provide supporting numerical results to this point. Keywords Energy applications · Stochastic optimization · Integer programming
* Thomas Kallabis thomas.kallabis@uni‑due.de 1
House of Energy Markets and Finance, University of Duisburg-Essen, Essen, Germany
2
Department of Mechanical Engineering, University of Maryland, College Park, USA
3
Norwegian University of Science and Technology, Trondheim, Norway
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1 Introduction 1.1 Motivation Investments in power generation assets are multi-year projects with high associated costs and lifetimes that usually last several decades. Market circumstances can significantly change over those time periods. One important aspect has been the restructuring of electricity markets undertaken in Europe, the U.S. and other parts of the world since the 1990s. Despite the introduction of competition, market concentration in the liberalized electricity markets frequently remains high. E. g. [11] report based on data from the European Commission that in 17 out of 25 reviewed countries the electricity generation business remains highly concentrated (Herfindahl–Hirschman Index (HHI) between 1800 and 5000) or even very highly concentrated (HHI above 5000). Over the last decade, market power of the big, usually incumbent firms has probably somewhat declined in
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