Strategic investment in electricity markets: Robust optimization versus stochastic programming
Decarbonization policies have spurred the adoption of variable renewable energy (VRE) technologies such as wind and solar power. To enable flexible resources and accommodate VRE’s intermittency, electricity markets are shifting toward renewable-aware dispatch based on stochastic optimization. Howeve...
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| Published in: | European journal of operational research |
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| Main Authors: | , , , , |
| Format: | Journal Article |
| Language: | English |
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Elsevier B.V
2025
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| ISSN: | 0377-2217, 1872-6860 |
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| Abstract | Decarbonization policies have spurred the adoption of variable renewable energy (VRE) technologies such as wind and solar power. To enable flexible resources and accommodate VRE’s intermittency, electricity markets are shifting toward renewable-aware dispatch based on stochastic optimization. However, strategic firms may exploit such market structures to manipulate prices to their advantage. To complement the extant literature, we compare investment decisions as well as worst-case profits and losses in the context of generation expansion by a strategic firm that uses either risk-averse stochastic programming or robust optimization. The former is a bi-level optimization problem, whereas the latter is a tri-level problem. Our contributions are threefold in addressing policy and methodological challenges. First, we demonstrate that using robust optimization instead of stochastic programming generally leads to investment plans with a higher share of VRE because it serves as a hedge during undesirable realizations with low consumer willingness to pay and high marginal costs for conventional generation. Second, a regret analysis shows that the worst-case profit is significantly reduced if an investor uses expansion decisions from stochastic programming, highlighting the importance of selecting a methodology aligned with the main objective of the investor. The effect is especially pronounced if decisions stem from a social planner, thereby indicating how a conventional, centralized perspective may fail to reflect private incentives for generation expansion in evolving electricity markets. Third, the analysis of strategic behavior necessitates state-of-the-art decomposition techniques such as the constraint generation-based algorithm and the column-and-constraint generation algorithm for the bi- and tri-level problems, respectively.
•Strategic two-stage generation-expansion planning under uncertainty is addressed.•Novel strategic robust optimization with recourse formulation is presented.•Robust optimization and risk-averse stochastic programming frameworks are compared.•Exact solution procedures are applied.•Unsuitable modeling tools lead to significant reductions in the profit. |
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| AbstractList | Decarbonization policies have spurred the adoption of variable renewable energy (VRE) technologies such as wind and solar power. To enable flexible resources and accommodate VRE’s intermittency, electricity markets are shifting toward renewable-aware dispatch based on stochastic optimization. However, strategic firms may exploit such market structures to manipulate prices to their advantage. To complement the extant literature, we compare investment decisions as well as worst-case profits and losses in the context of generation expansion by a strategic firm that uses either risk-averse stochastic programming or robust optimization. The former is a bi-level optimization problem, whereas the latter is a tri-level problem. Our contributions are threefold in addressing policy and methodological challenges. First, we demonstrate that using robust optimization instead of stochastic programming generally leads to investment plans with a higher share of VRE because it serves as a hedge during undesirable realizations with low consumer willingness to pay and high marginal costs for conventional generation. Second, a regret analysis shows that the worst-case profit is significantly reduced if an investor uses expansion decisions from stochastic programming, highlighting the importance of selecting a methodology aligned with the main objective of the investor. The effect is especially pronounced if decisions stem from a social planner, thereby indicating how a conventional, centralized perspective may fail to reflect private incentives for generation expansion in evolving electricity markets. Third, the analysis of strategic behavior necessitates state-of-the-art decomposition techniques such as the constraint generation-based algorithm and the column-and-constraint generation algorithm for the bi- and tri-level problems, respectively. Decarbonization policies have spurred the adoption of variable renewable energy (VRE) technologies such as wind and solar power. To enable flexible resources and accommodate VRE’s intermittency, electricity markets are shifting toward renewable-aware dispatch based on stochastic optimization. However, strategic firms may exploit such market structures to manipulate prices to their advantage. To complement the extant literature, we compare investment decisions as well as worst-case profits and losses in the context of generation expansion by a strategic firm that uses either risk-averse stochastic programming or robust optimization. The former is a bi-level optimization problem, whereas the latter is a tri-level problem. Our contributions are threefold in addressing policy and methodological challenges. First, we demonstrate that using robust optimization instead of stochastic programming generally leads to investment plans with a higher share of VRE because it serves as a hedge during undesirable realizations with low consumer willingness to pay and high marginal costs for conventional generation. Second, a regret analysis shows that the worst-case profit is significantly reduced if an investor uses expansion decisions from stochastic programming, highlighting the importance of selecting a methodology aligned with the main objective of the investor. The effect is especially pronounced if decisions stem from a social planner, thereby indicating how a conventional, centralized perspective may fail to reflect private incentives for generation expansion in evolving electricity markets. Third, the analysis of strategic behavior necessitates state-of-the-art decomposition techniques such as the constraint generation-based algorithm and the column-and-constraint generation algorithm for the bi- and tri-level problems, respectively. •Strategic two-stage generation-expansion planning under uncertainty is addressed.•Novel strategic robust optimization with recourse formulation is presented.•Robust optimization and risk-averse stochastic programming frameworks are compared.•Exact solution procedures are applied.•Unsuitable modeling tools lead to significant reductions in the profit. |
| Author | Siddiqui, Afzal S. Baringo, Luis Boomsma, Trine K. García-Cerezo, Álvaro García-Bertrand, Raquel |
| Author_xml | – sequence: 1 givenname: Álvaro orcidid: 0000-0002-2661-046X surname: García-Cerezo fullname: García-Cerezo, Álvaro email: Alvaro.GarciaCerezo@uclm.es organization: Escuela de Ingeniería Industrial y Aeroespacial, Power and Energy Analysis and Research Laboratory, Universidad de Castilla-La Mancha, Campus Fábrica de Armas, Toledo, 45071, Spain – sequence: 2 givenname: Afzal S. orcidid: 0000-0003-1841-1310 surname: Siddiqui fullname: Siddiqui, Afzal S. email: asiddiq@dsv.su.se organization: Department of Computer and Systems Sciences, Stockholm University, Sweden – sequence: 3 givenname: Trine K. orcidid: 0000-0001-5127-1888 surname: Boomsma fullname: Boomsma, Trine K. email: trine@math.ku.dk organization: Department of Mathematical Sciences, University of Copenhagen, Denmark – sequence: 4 givenname: Raquel orcidid: 0000-0002-4981-3796 surname: García-Bertrand fullname: García-Bertrand, Raquel email: Raquel.Garcia@uclm.es organization: Escuela Técnica Superior de Ingeniería Industrial, Power and Energy Analysis and Research Laboratory, Universidad de Castilla-La Mancha, Campus Universitario s/n, Ciudad Real, 13071, Spain – sequence: 5 givenname: Luis orcidid: 0000-0002-8678-3258 surname: Baringo fullname: Baringo, Luis email: Luis.Baringo@uclm.es organization: Escuela Técnica Superior de Ingeniería Industrial, Power and Energy Analysis and Research Laboratory, Universidad de Castilla-La Mancha, Campus Universitario s/n, Ciudad Real, 13071, Spain |
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| Keywords | Generation-expansion planning Robust optimization Strategic investor OR in energy Stochastic programming |
| Language | English |
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| Title | Strategic investment in electricity markets: Robust optimization versus stochastic programming |
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