Journal
APPLIED ENERGY
Volume 285, Issue -, Pages -Publisher
ELSEVIER SCI LTD
DOI: 10.1016/j.apenergy.2021.116487
Keywords
Electricity market; Price manipulation; Cross-product arbitrage; Renewable cost recovery; Renewable investment; MPEC
Categories
Funding
- National Natural Science Foundation of China [U1966204]
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The past decade has seen a rapid development of renewable energy and significant changes in the electricity market mix. This article examines how thermal power plants can exploit arbitrage possibilities to lower spot prices, squeeze renewable profit margins, and impact market equilibrium under high renewable penetration. By building a model and evaluating the impact of thermal arbitrage on renewable investments, policy recommendations are provided to regulate such strategic behaviors.
Last decade has witnessed a booming development in renewables and significant changes in the generation mix around the world. Given their relatively low variable costs, renewables are expected to be cleared first in the electricity market and earn profit margins under a marginal pricing mechanism to recover their fixed costs. However, some strategic price manipulation behaviors may distort the spot price and cause market failure. In this article, we show that thermals could exploit cross-product arbitrage possibilities through long-term contracts under high renewable penetration, and thereby lower spot prices and squeeze renewable profit margins, discouraging future renewable investments. We build a bi-level model to study strategic behaviors of thermals discussed above and their impacts on the market equilibrium. The model can be recast as a mathematical problem with equilibrium constraints (MPEC) and further formulated as a mixed integer linear programming (MILP) after proper linearization. We then use internal rates of return (IRR) and minimal acceptable rates of return (MARR) to evaluate impacts of thermal arbitrage on renewable investments. A case study is performed to validate the model using the CAISO data. Finally, we provide policy recommendations to regulate this specific type of strategic behaviors.
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