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

Fraunholz, Christoph; Miskiw, Kim K.; Kraft, Emil ORCID iD icon; Fichtner, Wolf ORCID iD icon; Weber, Christoph


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 crossborder effects.

Volltext §
DOI: 10.5445/IR/1000140411
Veröffentlicht am 26.11.2021
Cover der Publikation
Zugehörige Institution(en) am KIT Institut für Industriebetriebslehre und Industrielle Produktion (IIP)
Publikationstyp Forschungsbericht/Preprint
Publikationsmonat/-jahr 11.2021
Sprache Englisch
Identifikator ISSN: 2196-7296
KITopen-ID: 1000140411
HGF-Programm 37.12.01 (POF IV, LK 01) Digitalization & System Technology for Flexibility Solutions
Verlag Karlsruher Institut für Technologie (KIT)
Umfang 45 S.
Serie Working Paper Series In Production And Energy ; 62
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