PhD Defense ved Rune Ramsdal Ernstsen

Title: Operation, Investment and Hedging in Electricity Markets

With increased decarbonazation goals large scale renewable electricity generation has to be deployed in the electricity system along with flexible generation to ensure electricity security in periods with low renewable generation. This will change the dynamics of future electricity prices and in turn impact the value of generation technologies. In this thesis we investigate valuation of generation, hedging in the electricity markets and the impact of market power. The first paper develops hedging models for a power producer delivering electricity on fixed price contracts in the Nordic electricity market. We find that there is significant potential in utilizing the skewness of the payoff distribution and focusing only on the expected loss instead of the variance. The second paper studies investment in generation by comparing a monopolist with a social planner as well as the impact of market power for the monopolist. We find that the monopolist invests later and in smaller capacity than the social planner and that increased market share further delay investment and increase capacity. The third paper develops valuation models for inflexible generation, flexible generation and a storage technology where the prices bases on diffusion or jump diffusion models. The models are calibrated to Danish electricity prices and the impact of conjectured market changes is studied. The fourth paper develops an expectation maximization algorithm that allows for calibration of price models, where the jump density is a mixture of two normal distributions. This is shown to capture the distributional properties of electricity prices significantly better.

Supervisor: Assoc. Prof. Trine Krogh Boomsma

 Assessment committee:

Prof. Mogens Steffensen, Math, Chairman, University of Copenhagen

Prof. Kristian Miltersen, Copenhagen Business School

Prof. Stein-Erik Fleten, Norwegian University of Science and Technology