Wednesday, 16:15 - 16:40 h, Room: MA 549

 

Yves Smeers
Stochastic equilibrium in investment models: Capacity expansion in the power

Coauthor: Danny Ralph

 

Abstract:
An investor in power generation assets faces unprecedented uncertainty on the evolution of the sector. The market equilibrium is hence one under uncertainty. Agents can be risk neutral or risk averse. We therefore
insert risk functions in order to account for idiosyncratic risk (risk that is not priced by the CAPM) in
investments. Adding a risk function on the cost in a standard (stochastic) capacity expansion planning model can be done and we retain a convex program but it poses questions on the interpretation.
We structure the discussion the interpretation around market completeness:
In a world of perfect risk trading we can derive a price vector for all instruments from a system risk function. The complete market can be represented in terms of stochastic programming.
The assumption of perfect risk trading is however rather heroic for investments that last 20 to 30 years. We hence relax the assumption of perfect risk trading and allow for different stochastic discount factors. The interpretation becomes more difficult since the incomplete market is no longer amenable to a stochastic programming approach.

 

Talk 3 of the invited session Wed.3.MA 549
"Congestion management and pricing" [...]
Cluster 18
"Optimization in energy systems" [...]

 

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