Stochastic Optimal Bid to Electricity Markets with Environmental Risk Constraints

[...] I salute the efforts and agreements being made (in favor of sustainable development) [...] But we must realize that the water crisis and the aggression to the environment is not the cause. The cause is the model of civilization that we have created. And the thing we have to reexamine is our way of life [...] Development cannot go against happiness. It has to work in favor of human happiness, of love on Earth, human relationships, caring for children, having friends, having the basics. Precisely because this is the most precious treasure we have: happiness. When we fight for the environment, we must remember that the first element of the environment is called human happiness. There are many factors that influence the day-ahead market bidding strategies of a generation company (GenCo) in the current energy market framework. Environmental policy issues have become more and more important for fossil-fuelled power plants and they have to be considered in their management , giving rise to emission limitations. This work allows to investigate the influence of both the allowances and emission reduction plan, and the incorporation of the derivatives medium-term commitments in the optimal generation bidding strategy to the day-ahead electricity market. Two different technologies have been considered: the coal thermal units, high-emission technology, and the combined cycle gas turbine units, low-emission technology. The Iberian Electricity Market and the Spanish National Emissions and Allocation Plans are the framework to deal with the environmental issues in the day-ahead market bidding strategies. To address emission limitations, some of the standard risk management methodologies developed for financial markets, such as Value-at-Risk (VaR) and Conditional Value-at-Risk (CVaR), have been extended. This study offers to electricity generation utilities a mathematical model to determinate the individual optimal generation bid to the wholesale electricity market, for each one of their generation units that maximizes the long-run profits of the utility abiding by the Iberian Electricity Market rules, the environmental restrictions set by the EU Emission Trading Scheme, as well as the restrictions set by the Spanish National Emissions Reduction Plan. The economic implications for a GenCo of including the environmental restrictions of these National Plans are analyzed and the most remarkable results will be presented. Acknowledgements I gratefully acknowledge the contributions of my advisor Prof. F.-Javier Heredia for his valuable comments, which greatly helped me to clarify and improve the contents of this work. I also would like to …