Asset Profitability in the Electricity Sector: An Iterative Approach in a Linear Optimization Model

Annika Gillich and Kai Hufendiek
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Annika Gillich: IER—Institute of Energy Economics and Rational Energy Use, University of Stuttgart, Heßbrühlstraße 49a, DE-70565 Stuttgart, Germany
Kai Hufendiek: IER—Institute of Energy Economics and Rational Energy Use, University of Stuttgart, Heßbrühlstraße 49a, DE-70565 Stuttgart, Germany

Energies, 2022, vol. 15, issue 12, 1-31

Abstract: In a competitive electricity market, generation capacities can exactly cover their full costs. However, the real market deviates from this ideal in some aspects. One is the concern of non-existent or insufficient scarcity prices. We present an iterative method in a linear optimization model to investigate the profitability of assets in the absence of scarcity prices and how the system changes when this risk is incorporated into investors’ expectations. Therefore, we use a two-step optimization of capacity planning and unit commitment. Iteratively, mark-ups at the height of uncovered costs are added to investment costs. This typically leads to a system with better investment profitability while keeping the system cost increase low. The methodology is applied to a simplified brownfield generation system, targeting CO 2 -free power generation within 25 years. In a model with annual foresight of actors, iterations result in a generation system with significantly lower (or even no) uncovered costs for new investments within ten or fewer iterations. Our example case with full foresight shows that early-added gas (combined cycle) and wind onshore capacities are able to recover their full costs over a lifetime, even without scarcity prices. However, the contribution margin gap remains high, especially for storage and biomass.

Keywords: electricity market modelling; power sector; asset profitability; optimization; iterative method; scarcity prices (search for similar items in EconPapers)
JEL-codes: Q Q0 Q4 Q40 Q41 Q42 Q43 Q47 Q48 Q49 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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