Investment and Operational Planning for electricity markets with massive entry of renewable energy

Abstract

In wholesale electricity markets, electricity producers and the independent system operator (ISO) play a central role. The ISO is responsible for minimizing production costs while satisfying supply-demand balance and capacity constraints. In this paper, we study a continuous-time problem in which the ISO seeks to minimize the joint cost of operation and investment in an electricity network. The problem is formulated in terms of operational and investment control variables. We analyze the hierarchy between these controls and use the so-called Day-Ahead Problem to find an explicit form of the optimal operation. This allows us to reformulate the investment problem as a stochastic control problem with state constraints. We extend the results of state-constrained stochastic control to fit our setting. In particular, we use a version of the Pointing Inward Condition to fully characterize the value of the problem as the unique viscosity solution of a constrained HJB equation. We then assign a specific dynamic to the capacity-demand process and discuss how the assumptions for the HJB characterization result in a budget constraint for the planning. Finally, we run simulations for a three-node setting that resembles the Chilean market. We analyze short-, medium-, and long-term planning scenarios and discuss how to transition toward a system with high penetration of renewable energy.