Evaluating Renewable Energy and Electricity Prices Using a Polynomial Process Model
Investigating the relationship between renewable energy integration and electricity prices using a polynomial process model. The study focuses on mean reversion and price spikes in the context of climate scenarios and financial risk, exploring key behaviors and components such as mean-reverting diffusion processes and polynomial functions. Research areas include parameter association with generation fleet changes, market assessments, calibration with hourly prices, and merit order modeling for energy markets. Additionally, the merit order model partitions price ranges and addresses research questions related to pricing structures and wind/solar capacity impact on prices.
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Presentation Transcript
Evaluating Renewable Energy and Electricity Prices Using a Polynomial Process Model BIRS Workshop on Climate Scenarios and Financial Risk Leonard Olien PhD Student, University of Calgary July 3 8, 2022
Polynomial Process Key Behaviours: mean reversion and price spikes Components: 1) Underlying Factor(s) follow a mean reverting diffusion process(es) 2) Price is an increasing polynomial function of the underlying factor(s) Nice result: Forward price is also a polynomial function Source: Tony Ware, Polynomial Processes for Power Prices , Applied Mathematical Finance, 26.5 (2020, pp 453-474 2
Areas of Research As a Reduced Form Model Can we associate different parameter values with changes in generation fleet, especially more wind, solar and storage? Market Assessment Tool Can we identify levels of wind/solar penetration that lead to market failure? Polynomial Model How do we calibrate with hourly prices? Merit Order Model As a Structural Model (?) represents the energy market merit order ?? represents net demand How do we estimate model parameters from historical merit order and price data?
Merit Order Model Partition price range into N price Offer Volume is a function of price: Reduced Form Model Create counterfactural electricity price time series for model calibration Structural Model ? 1 points will determine the polynomial of degree N-2. Simplifies model calibration 4
Merit Order Research Questions What is the appropriate price partition? For the Structural Model interpretation: How do we handle offer volumes at $0/MWh and near the price cap? What would prices have been with higher installed wind and solar capacity?
Thank you. Leonard Olien leonard.olien@ucalgary.ca www.linkedin.com/in/leonard-olien 6
