We formulate an equilibrium model of intraday trading in electricity markets. Agents face balancing constraints between their customers consumption plus intraday sales and their production plus intraday purchases. They have continuously updated forecast of their customers consumption at maturity. Forecasts are prone to idiosyncratic noise as well as common noise (weather). Agents production capacities are subject to independent random outages, which are each modeled by a Markov chain. The equilibrium price is defined as the price that minimizes trading cost plus imbalance cost of each agent and satisfies the usual market clearing condition. Existence and uniqueness of the equilibrium are proved, and we show that the equilibrium price and the optimal trading strategies are martingales. The main economic insights are the following. (i) When there is no uncertainty on generation, it is shown that the market price is a convex combination of forecasted marginal cost of each agent, with deterministic weights. Furthermore, the equilibrium market price is consistent with Almgren and Chriss's model and we identify the fundamental part as well as the permanent market impact. It turns out that heterogeneity across agents is a necessary condition for Samuelson's effect to hold. We show that when heterogeneity lies only on costs, Samuelson's effect holds true. A similar result stands when heterogeneity lies only on market access quality. (ii) When there is production uncertainty only, we provide an approximation of the equilibrium for large number of players. The resulting price exhibits increasing volatility with time.

Equilibrium price in intraday electricity markets / R. Aïd, A. Cosso, H. Pham. - In: MATHEMATICAL FINANCE. - ISSN 0960-1627. - 32:2(2022 Apr), pp. 517-554. [10.1111/mafi.12340]

Equilibrium price in intraday electricity markets

A. Cosso
Penultimo
;
2022

Abstract

We formulate an equilibrium model of intraday trading in electricity markets. Agents face balancing constraints between their customers consumption plus intraday sales and their production plus intraday purchases. They have continuously updated forecast of their customers consumption at maturity. Forecasts are prone to idiosyncratic noise as well as common noise (weather). Agents production capacities are subject to independent random outages, which are each modeled by a Markov chain. The equilibrium price is defined as the price that minimizes trading cost plus imbalance cost of each agent and satisfies the usual market clearing condition. Existence and uniqueness of the equilibrium are proved, and we show that the equilibrium price and the optimal trading strategies are martingales. The main economic insights are the following. (i) When there is no uncertainty on generation, it is shown that the market price is a convex combination of forecasted marginal cost of each agent, with deterministic weights. Furthermore, the equilibrium market price is consistent with Almgren and Chriss's model and we identify the fundamental part as well as the permanent market impact. It turns out that heterogeneity across agents is a necessary condition for Samuelson's effect to hold. We show that when heterogeneity lies only on costs, Samuelson's effect holds true. A similar result stands when heterogeneity lies only on market access quality. (ii) When there is production uncertainty only, we provide an approximation of the equilibrium for large number of players. The resulting price exhibits increasing volatility with time.
Equilibrium model; intraday electricity markets; Samuelson's effect; martingale optimality principle; coupled forward-backward SDE with jumps;
Settore MAT/06 - Probabilita' e Statistica Matematica
11-nov-2021
https://doi-org.ezproxy.unibo.it/10.1111/mafi.12340
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/2434/931983
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