Modeling investment decisions from heterogeneous firms under imperfect information and risk in wholesale electricity markets

Anwar, Muhammad Bashar; Stephen, Gord; Dalvi, Sourabh; Frew, Bethany; Ericson, Sean; Brown, Maxwell; O’Malley, Mark

doi:10.1016/j.apenergy.2021.117908

Cited by 37 publications

(18 citation statements)

References 38 publications

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“…Our finding here also supports the results in [13,14], where they find that with agents applying various hurdle rates, the transition to a low-carbon system is accelerated due to the investments from agents that apply lower hurdle rates, and those agents take a major share of the investments [34].…”

Section: Heterogeneous Hurdle Rate (Hhr) Casesupporting

confidence: 90%

Modelling the Transition towards a Carbon-Neutral Electricity System—Investment Decisions and Heterogeneity

2021

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To achieve the climate goals of the Paris Agreement, greenhouse gas emissions from the electricity sector must be substantially reduced. We develop an agent-based model of the electricity system with heterogeneous agents who invest in power generating capacity under uncertainty. The heterogeneity is characterised by the hurdle rates the agents employ (to manage risk) and by their expectations of the future carbon prices. We analyse the impact of the heterogeneity on the transition to a low carbon electricity system. Results show that under an increasing CO2 tax scenario, the agents start investing heavily in wind, followed by nuclear and to some extent in natural gas fired power plants both with and without carbon capture and storage as well as biogas fired power plants. However, the degree to which different technologies are used depend strongly on the carbon tax expectations and the hurdle rate employed by the agents. Comparing to the case with homogeneous agents, the introduction of heterogeneity among the agents leads to a faster CO2 reduction. We also estimate the so called “cannibalisation effect” for wind and find that the absolute value of wind does not drop in response to higher deployment levels, but the relative value does decline.

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Section: Heterogeneous Hurdle Rate (Hhr) Casesupporting

confidence: 90%

Modelling the Transition towards a Carbon-Neutral Electricity System—Investment Decisions and Heterogeneity

2021

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“…The computational challenges of equilibrium models can be mitigated by moving to other model types, such as system dynamics (e.g., Petitet et al, 2017) or agent-based simulations (e.g., Botterud et al, 2007;Anwar et al, 2022). However, while the mentioned articles consider uncertainties and risk aversion, none of them features a geographical scope covering more than a single country.…”

Section: Literature Review and Research Gapmentioning

confidence: 99%

“…Over time, this model class was extended to consider uncertainties (e.g., Swider and Weber, 2007;Spiecker et al, 2013;Fürsch et al, 2014;Scott et al, 2021) and even risk aversion (e.g., Diaz et al, 2019;Möbius et al, 2021). However, such optimization models are not able to adequately represent competitive electricity markets, where investment decisions are made by individual market players based on market price expectations under imperfect information (Weber et al, 2021;Anwar et al, 2022).…”

Section: Literature Review and Research Gapmentioning

confidence: 99%

On the Role of Risk Aversion and Market Design in Capacity Expansion Planning

Fraunholz¹,

Miskiw²,

Kraft³

et al. 2023

The Energy Journal

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Investment decisions in competitive power markets are based upon thorough profitability assessments. Thereby, investors typically show a high degree of risk aversion, which is the main argument for capacity mechanisms being implemented around the world. In order to investigate the interdependencies between investors' risk aversion and market design, we extend the agent-based electricity market model PowerACE to account for long-term uncertainties. This allows us to model capacity expansion planning from an agent perspective and with different risk preferences. The enhanced model is then applied in a multi-country case study of the European electricity market. Our results show that assuming risk-averse rather than risk-neutral investors leads to slightly reduced investments in dispatchable capacity, higher wholesale electricity prices, and reduced levels of resource adequacy. These effects are more pronounced in an energy-only market than under a capacity mechanism. Moreover, uncoordinated changes in market design may also lead to negative cross-border effects.

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“…In response to these limitations associated with social planner models with perfect information, there is an emerging literature using agent-based models where adaptive decisions by heterogeneous firms may be characterized by imperfect information and bounded rationality. 55 Models also account for variation in financial characteristics of firms such as the cost of capital and risk tolerance of different electric companies. 56 Some models also differentiate between cost-of-service and competitive market regions, which can alter firm entry, exit, and operational decisions.…”

Section: Modeling Challenges and Needsmentioning

confidence: 99%