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Market design and regulation for stochastic electricity supply chains

Climate change and related efforts to reduce greenhouse gas emissions have recently been posing enormous challenges to all parts of the electricity supply chain, including generation, network services and retailing. One of the main difficulties to achieve reduced greenhouse gas emissions stems from the need to increasingly rely on intermittent and stochastic generation from wind and solar resources. Due to their complex dynamics and interdependencies, they fundamentally jeopardize and question the functioning of traditional approaches: First, since electricity has to be sold forward, i.e., before the physical delivery, wind and solar producers usually fail to deliver the exact amount of electricity sold in the market. Second, network operators need to procure reliable generation in order to ensure system stability and to avoid costly blackouts. They face the challenge to evaluate how much each single stochastic producers can contribute to system stability and how their contribution will be remunerate.

These problems are typically tackled in the field of energy economics, but they may also be seen from a supply chain perspective: In a horizontal supply chain comprising wind or solar power plants, the network operator procures from a portfolio of multiple stochastic suppliers in order to ensure an economic and reliable supply of electricity.

The novel contribution of the project is therefore to bring together specific energy market know-how and methods from supply chain management. Our research aims at providing answers to relevant yet unresolved problems in the field of market design and regulation of stochastic electricity supply chains, e.g., regarding remuneration schemes for capacity mechanisms. To achieve this, we propose a collaborative project of the Department of Economics and Industrial Organization, led by Prof. Felix Höffler, and the Department of Supply Chain Management and Management Science, headed by Prof. Ulrich Thonemann. Both groups have been highly active and successful in their respective area of research. Prof. Felix Höffler and his group work on regulatory economics, competition policy and industrial organization, with a particular focus on electricity systems (e.g., Höffler and Wambach (2013), Gebhardt and Höffler (2013), Hagspiel et al. (2014), or Elberg and Hagspiel (2015)). Recently, two particular projects allowed to lay ground for the contents of this proposal. First, the DFG-, which has yielded numerous PhD theses (Joachim Bertsch (forthcoming), Simeon Hagspiel (forthcoming) and Stefan Lorenczik (forthcoming)), as well as a number of relevant papers (Bertsch (2015), Bertsch and Hagspiel (2015), Bertsch, Hagspiel and Just (2015), Bertsch et al. (2015), Hagspiel (forthcoming), Lorenczik (forthcoming)).

Second, the UoC Emerging Group „Energy Transition and Climate Change (ET-CC)" a project at the interface between meteorology and energy economics research. Prof. Ulrich Thonemann and his group conduct research in the field of supply chain management and management science. The application of general concepts to electricity systems are an emerging field of interest and research effort. For instance, insights from inventory management may be applied to energy storages (e.g., Schneider, Klabjan and Thonemann (2013b)), while unit commitment models are an operations research tool that may be used % among other fields % in electricity systems (e.g., Schneider, Klabjan and Thonemann (2013a)). Recently, the supply chain management research group has established ties with the Institute of Sustainability Analysis at the University of Sydney to solve location planning problems of renewable energy powered plants in a high resolution setting in Australia (Lenzen et al. 2016).


Prof. Dr. Felix Höffler, Institute of Energy Economics

Prof. Ulrich Thonemann, Department of Supply Chain Management & Management Science