The Department of Business and Management Science and the ENE centre invite you to a faculty seminar with Bert Willems, UC Louvain.
The growing share of renewable energy requires sufficient investment in power system flexibility. In this paper, we frame a three-stage peak-load pricing model consisting of investment, commitment, and production, considering that electricity generation is costly to adjust on short notice. The results demonstrate the importance of increasing time granularity in electricity markets with efficient state-contingent prices. Adapting the idea of real options theory that waiting is valuable, flexible firms avoid producing in the low-demand state and earn a premium to recoup investment costs.
On top of that, this paper discusses the efficiency of alternative market designs in the investment of flexible assets. In the absence of an efficient real-time market, day-ahead forward price results in under-investment in flexible technologies and over-investment in inflexible ones. This distortion, in theory, can be corrected by a time-varying options market with technology-specific payment while any centralized auction fails to achieve optimum. Finally, this work briefly illustrates the effect of demand flexibility, showing that an increase in demand response does not necessarily reduce the reliance on production flexibility if rationing is done randomly.