Joint optimization of sales-mix and generation plan for a large electricity producer

The paper develops a typical management problem of a large power producer (i.e., he can partly influence the market price). In particular, he routinely needs to decide how much of his generation it is preferable to commit to fixed-price bilateral contracts (e.g., futures) or to the spot market. However, he also needs to plan how to distribute the production between the different plants under his control. The two decisions, namely the sales-mix and the generation plan, naturally interact since the opportunity to influence the spot price depends, among other things, on the amount of the energy that the producer directs on the spot market. We develop a risk management problem, since we consider an optimization problem combining a trade-off between expectation and conditional value at risk of the profit function of the producer. The sources of uncertainty are relatively large and include demand, renewables generation, and the fuel costs of conventional plants. We also endogenously model the price of futures in a way that reflects an information advantage of a large power producer. In particular, it is assumed that the market forecasts the price of futures in a naive way, namely not anticipating the impact of the large producer on the spot market. The paper provides a MILP formulation of the problem and analyzes the solution through a simulation based on data from the Spanish power market.

Automated summary

The paper focuses on a typical management problem faced by a large power producer, who has partial influence on the market price. It explores the decision-making process of committing generation to fixed-price bilateral contracts or the spot market, as well as distributing production among different plants. The study formulates a risk management problem by optimizing the profit function with a trade-off between expectation and conditional value at risk. Uncertainties, including demand, renewables generation, and fuel costs, are considered, and the paper also models the futures price to reflect the advantage of the power producer. A MILP formulation is provided, and a simulation using data from the Spanish power market is conducted to analyze the solution.