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Optimal Selection of Distributed Energy Resources under Uncertainty and Risk Aversion

Maurovich-Horvat, L; De Reyck, B; Rocha, P; Siddiqui, AS; (2016) Optimal Selection of Distributed Energy Resources under Uncertainty and Risk Aversion. IEEE Transactions on Engineering Management , 63 (4) pp. 462-474. 10.1109/TEM.2016.2592805. Green open access

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Abstract

The adoption of small-scale electricity generation has been hindered by uncertain electricity and gas prices. In order to overcome this barrier to investment, we develop a mean-risk optimization model for the long-term risk management problem of an energy consumer using stochastic programming. The consumer can invest in a number of generation technologies, and also has access to electricity and gas futures to reduce its risk. We examine the role of on-site generation in the consumer’s risk management strategy, as well as interactions between on-site generation and financial hedges. Our study shows that by swapping electricity (with high price volatility) for gas (with low price volatility), even relatively inefficient technologies reduce risk exposure and CO _2 emissions. The capability of on-site generation is enhanced through the use of combined heat and power (CHP) applications. In essence, by investing in a CHP unit, a consumer obtains the option to use on-site generation whenever the electricity price peaks, thereby reducing its financial risk. Finally, in contrast to the extant literature, we demonstrate that on-site generation affects the consumer’s decision to purchase financial hedges. In particular, while on-site generation and electricity futures may act as substitutes, on-site generation and gas futures can function as complements.

Type: Article
Title: Optimal Selection of Distributed Energy Resources under Uncertainty and Risk Aversion
Open access status: An open access version is available from UCL Discovery
DOI: 10.1109/TEM.2016.2592805
Publisher version: http://dx.doi.org/10.1109/TEM.2016.2592805
Language: English
Additional information: Copyright © 2016 IEEE. Personal use of this material is permitted. Permission from IEEE must be obtained for all other uses, in any current or future media, including reprinting/republishing this material for advertising or promotional purposes, creating new collective works, for resale or redistribution to servers or lists, or reuse of any copyrighted component of this work in other works.
Keywords: Decisions under risk and uncertainty; management of new technologies; stochastic optimization; sustainability; technology selection
UCL classification: UCL > Provost and Vice Provost Offices
UCL > Provost and Vice Provost Offices > UCL BEAMS
UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Engineering Science
UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Engineering Science > UCL School of Management
UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Maths and Physical Sciences
UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Maths and Physical Sciences > Dept of Statistical Science
URI: http://discovery.ucl.ac.uk/id/eprint/1503381
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