A Multi-Stage Stochastic Programming Model for Managing Risk-Optimal Electricity Portfolios. Stochastic Programming and Electricity Risk Management

Similar documents
Simplified stage-based modeling of multi-stage stochastic programming problems

MULTI-STAGE STOCHASTIC ELECTRICITY PORTFOLIO OPTIMIZATION IN LIBERALIZED ENERGY MARKETS

Scenario reduction and scenario tree construction for power management problems

Stochastic Programming in Gas Storage and Gas Portfolio Management. ÖGOR-Workshop, September 23rd, 2010 Dr. Georg Ostermaier

Dynamic Risk Management in Electricity Portfolio Optimization via Polyhedral Risk Functionals

Energy Systems under Uncertainty: Modeling and Computations

Robust Dual Dynamic Programming

VOLATILITY EFFECTS AND VIRTUAL ASSETS: HOW TO PRICE AND HEDGE AN ENERGY PORTFOLIO

Dynamic Replication of Non-Maturing Assets and Liabilities

Approximation of Continuous-State Scenario Processes in Multi-Stage Stochastic Optimization and its Applications

Optimal construction of a fund of funds

Approximations of Stochastic Programs. Scenario Tree Reduction and Construction

ÖGOR - IHS Workshop und ÖGOR-Arbeitskreis

Multistage Stochastic Programming

Robust Optimization Applied to a Currency Portfolio

Portfolio selection with multiple risk measures

Introducing Uncertainty in Brazil's Oil Supply Chain

Multistage Stochastic Programs

Investigation of the and minimum storage energy target levels approach. Final Report

Economic optimization in Model Predictive Control

Report for technical cooperation between Georgia Institute of Technology and ONS - Operador Nacional do Sistema Elétrico Risk Averse Approach

Portfolio Optimization using Conditional Sharpe Ratio

Contract Theory in Continuous- Time Models

ROBUST OPTIMIZATION OF MULTI-PERIOD PRODUCTION PLANNING UNDER DEMAND UNCERTAINTY. A. Ben-Tal, B. Golany and M. Rozenblit

On a Manufacturing Capacity Problem in High-Tech Industry

Universitat Politècnica de Catalunya (UPC) - BarcelonaTech

Robust Scenario Optimization based on Downside-Risk Measure for Multi-Period Portfolio Selection

Multistage Stochastic Demand-side Management for Price-Making Major Consumers of Electricity in a Co-optimized Energy and Reserve Market

Portfolio Management and Optimal Execution via Convex Optimization

Multistage Stochastic Mixed-Integer Programs for Optimizing Gas Contract and Scheduling Maintenance

Equity correlations implied by index options: estimation and model uncertainty analysis

Final exam solutions

ESG Yield Curve Calibration. User Guide

Risk Management for Chemical Supply Chain Planning under Uncertainty

Multi-Period Trading via Convex Optimization

5 th Annual CARISMA Conference MWB, Canada Square, Canary Wharf 2 nd February ialm. M A H Dempster & E A Medova. & Cambridge Systems Associates

Continuous-time Stochastic Control and Optimization with Financial Applications

Step 2: Determine the objective and write an expression for it that is linear in the decision variables.

A Recommended Financial Model for the Selection of Safest portfolio by using Simulation and Optimization Techniques

Dynamic Asset and Liability Management Models for Pension Systems

The Irrevocable Multi-Armed Bandit Problem

Martingale Pricing Theory in Discrete-Time and Discrete-Space Models

Technical Report Doc ID: TR April-2009 (Last revised: 02-June-2009)

PORTFOLIO OPTIMIZATION AND EXPECTED SHORTFALL MINIMIZATION FROM HISTORICAL DATA

Stochastic Programming: introduction and examples

Two-stage Robust Optimization for Power Grid with Uncertain Demand Response

On modelling of electricity spot price

Anatomy of Welfare Reform:

Optimal construction of a fund of funds

Implementing Models in Quantitative Finance: Methods and Cases

Investigations on Factors Influencing the Operational Benefit of Stochastic Optimization in Generation and Trading Planning

Electricity derivative trading: private information and supply functions for contracts

Electricity Swing Options: Behavioral Models and Pricing

Financial Giffen Goods: Examples and Counterexamples

Computational Finance. Computational Finance p. 1

Framework and Methods for Infrastructure Management. Samer Madanat UC Berkeley NAS Infrastructure Management Conference, September 2005

Analytical Option Pricing under an Asymmetrically Displaced Double Gamma Jump-Diffusion Model

Optimization Models in Financial Mathematics

Individual Asset Liability Management: Dynamic Stochastic Programming Solution

Arbitrage Conditions for Electricity Markets with Production and Storage

Idiosyncratic risk, insurance, and aggregate consumption dynamics: a likelihood perspective

The Journal of Risk (1 31) Volume 11/Number 3, Spring 2009

DUALITY AND SENSITIVITY ANALYSIS

MODELLING OPTIMAL HEDGE RATIO IN THE PRESENCE OF FUNDING RISK

Portfolio Optimization. Prof. Daniel P. Palomar

The Duration Derby: A Comparison of Duration Based Strategies in Asset Liability Management

STOCHASTIC PROGRAMMING FOR ASSET ALLOCATION IN PENSION FUNDS

An Empirical Study of Optimization for Maximizing Diffusion in Networks

A Markovian Futures Market for Computing Power

Two and Three factor models for Spread Options Pricing

Multistage risk-averse asset allocation with transaction costs

Valuation of performance-dependent options in a Black- Scholes framework

SOLVING ROBUST SUPPLY CHAIN PROBLEMS

ON THE ASSET ALLOCATION OF A DEFAULT PENSION FUND

Integrating strategic, tactical and operational supply chain decision levels in a model predictive control framework

CS 188: Artificial Intelligence. Outline

Worst-case-expectation approach to optimization under uncertainty

Optimal prepayment of Dutch mortgages*

Estimation of Volatility of Cross Sectional Data: a Kalman filter approach

Optimization in Finance

Progressive Hedging for Multi-stage Stochastic Optimization Problems

Smile in the low moments

INTERNATIONAL MONETARY FUND. Information Note on Modifications to the Fund s Debt Sustainability Assessment Framework for Market Access Countries

Behavioral pricing of energy swing options by stochastic bilevel optimization

The Value of Stochastic Modeling in Two-Stage Stochastic Programs

Optimal sale bid for a wind producer in Spanish electricity market.

Asset-Liability Management

The value of multi-stage stochastic programming in capacity planning under uncertainty

Optimal Portfolio Selection Under the Estimation Risk in Mean Return

Contents Critique 26. portfolio optimization 32

w w w. I C A o r g

Risk-Sensitive Querying for Adapting Web Service Compositions

Scenario Construction and Reduction Applied to Stochastic Power Generation Expansion Planning

SYSM 6304: Risk and Decision Analysis Lecture 6: Pricing and Hedging Financial Derivatives

Matlab Based Stochastic Processes in Stochastic Asset Portfolio Optimization

Online Appendix: Extensions

Resource Planning with Uncertainty for NorthWestern Energy

Journal of Computational and Applied Mathematics. The mean-absolute deviation portfolio selection problem with interval-valued returns

Modelling optimal decisions for financial planning in retirement using stochastic control theory

Overnight Index Rate: Model, calibration and simulation

Transcription:

A Multi-Stage Stochastic Programming Model for Managing Risk-Optimal Electricity Portfolios SLIDE 1

Outline Multi-stage stochastic programming modeling Setting - Electricity portfolio management Electricity Spot & Demand Process Specifying underlying uncertainty - Scenario tree generation Model Description & Application Scenarios Numerical results Supply contracts (Swing option) Real option (Power Plant) and Risk Management Conclusions SLIDE 2

Multistage modeling - Postmodernism Reject objective truth and global cultural narrative: complete decoupling of the multi-stage modeling process and the solution approach! 1 Optimization under uncertainty modeling approach: expectation-based multi-stage stochastic programming, worst-case robust optimization,... 2 Underlying solution technique: scenario tree-based deterministic equivalent formulation, primal/dual linear decision rules,... SLIDE 3

Multistage modeling - Old School Complete decoupling of scenario tree modeling and handling from the decision problem modeling process: Decision problem layer. Decision problem modeler only concerned with actions/decisions at stages. In case of trees and deterministic equivalent formulations: explicit decoupling of modeling and (scenario) tree handling. Scenario tree layer. Creating a scenario tree which optimally represents the subjective beliefs of the decision taker at each node. Data layer. Data structures, how to (memory-)optimally store large trees, and access ancestor tree nodes fast,... SLIDE 4

Multistage modeling - Old School (1) Modeler View (Stage) (2) Stochastic View (Tree) (3) Data View (Node) Root Stage Recourse Stage Terminal Stage SLIDE 5

Multistage modeling - New Age Complete decoupling of scenario tree modeling and handling from the decision problem modeling process: Decision problem layer. Decision problem modeler only concerned with actions/decisions at stages. In case of linear decision rules: 1 A. Georghiou, W. Wiesemann, and D. Kuhn. Generalized Decision Rule Approximations for Stochastic Programming via Liftings. Optimization Online. 2010. 2 D. Kuhn, W. Wiesemann, and A. Georghiou. Primal and Dual Linear Decision Rules in Stochastic and Robust Optimization. Mathematical Programming, online first. 2009. SLIDE 6

Multistage modeling - New Age (1) Modeler View (Stage) (2) Stochastic View (Upper/Lower Approximation) Root Stage Recourse Stage Terminal Stage SLIDE 7

Multi-stage modeling Complete decoupling of scenario tree modeling and handling from the decision problem modeling process: Decision problem layer. Decision problem modeler only concerned with actions/decisions at stages. In this talk, we will conduct an old-school approach using multi-stage scenario trees and use deterministic equivalent formulations to solve the problem, with a focus on communicability of models (electrical engineers and optimization wizards), and modular modeling structure (using an abstract model generator). SLIDE 8

Electricity Portfolio Optimization Classical bi-critertia risk-return portfolio optimization problems (minimize risk, maximize return) in a multi-stage stochastic setting. Example: Large consumer satisfies demand by: 1 buying at the uncertain spot market on day-ahead basis, 2 buying energy futures (base or peak), 3 buying contracts for delivery of energy in advance, 4 (optional) own production with some power plant. Stochastic optimization: 1 Uncertainty: spot price and demand. 2 Decision: composition of the electricity portfolio. SLIDE 9

Electricity Portfolio Optimization Daily (day-ahead hourly) electricity portfolio changes massively multi-stage! Trade-off between level of model detail (variables and constraints) and underlying uncertainty (dimension of underlying scenario tree), and solvability of the problem. Design of uncertainty: Instead of modeling price and demand as uni-variate time series (i.e. 8760 stages per year), we define one stage per day (24 dimensional time series with 365 stages per year). Hour-Blocks: To simplify the model we group the uncertainty in 6 4-hour blocks, i.e. we are dealing with a 6-dimensional instead of a 24-dimensional process. SLIDE 10

Electricity Portfolio Optimization 1 Model the uncertain spot price process. 2 Generate possible scenarios for the spot price movement and the demand by simulating disturbance in the respective models. 3 Construct a scenario tree from the fan of simulated trajectories. 4 Choose an appropriate risk measure. 5 Model decision problem as multi-stage stochastic optimization program. 6 Solve the optimization problem. Goals: Semi-automatization (workflow orchestration), and (multi-stage) modeling simplification/modularization. SLIDE 11

Spot & Demand Process The hourly spot prices at the EEX are modeled via linear regression. The main explainationary factors are 1 weekday, hour of the day, season and all combinations thereof 2 temperature 3 future prices The above factors model the average behavior of the price process. The peaks are captured by fitting a stable distribution to the residuals. The model is calibrated with data ranging from 01.01.2006-28.02.2007. Demand is modeled in a similar setting (fitted with one year of data). SLIDE 12

Simulations Both models may now be used to simulate possible future price and demand scenarios. Since we assume independence in the error terms of the two models we can pairwise merge the scenarios for demand and price developement. The resulting scenarios are merged into a tree structure. SLIDE 13

Model: Portfolio The energy portfolio in every hour block h and in every stage t consists of 1 contracted volume c t,h, 2 energy out of future contracts f t,h, 3 energy bought on the spot market s t,h and 4 energy produced with a power plant p t,h (optional). Note: We do not use (scenario tree) node-based formulations, which greatly enhances the readability. The conversion to a node-based formulation is done semi-automatically. SLIDE 14

Model: Objective Function The expenditure (over the whole time horizon) is given by e T = t T,h H e t,h where e t,s is the expenditure at stage t in hour block h given by e t,h = c t,h C + f t,h F t,h + s t,h S t,h + p t,h P with no recourse, where C, F h, S t,h, P are the prices of one MWh of energy from the supply contract, the future contract, the spot market and the power plant respectively. Our aim is to minimize e T + κavar α (e T ) i.e. to perform a bi-criteria optimization whichs keeps expected expenditure and its AV@R (risk) low. SLIDE 15

Model: Constraints Demand d t,h (stochastic variable) has to be met at every stage t and every hour h c t,h + f t,h + s t,h + p t,h d t,h, t T, h H Supply contract. Amount bought every hour is restrained by the constant γ u and γ h and the overall contracted volume C h for that hour block h (over the whole planning horizon) in the following way γ l C h c t,h γ u C h, t T, h H Supply contract. amount of energy bought in every scenario has to be within a certain range around the contracted value, i.e. δ l C h c t,h δ u C h t T,h H SLIDE 16

Model: Stylized Power Plant production p t,h is limited by a maximum amout π, i.e. p t,h π, t T, h H production of the power plant cannot change more than β MWh per hour block, i.e. p t,h p t,h 1 β, h = 2,..., 5, t T and p t,1 p t 1,6 β, t = 2,..., T. SLIDE 17

Model: Putting it all together minimize e T + AVaR α (e T ) subject to d t,h c t,h + f t,h + s t,h + p t,h c t,h C + f t,h F t,h + s t,h S t,h + p t,h P = e t,h γ l C h c t,h γ u C h δ l C h T,H c t,h δ u C h p t,h π p t,h p t,h 1 β p t,1 p t 1,6 β T,H e t,h = e T In the above program all variables are non-negative. SLIDE 18

Model: Putting it all together minimize s S P sc s + κ(q α + P s(n) z n n N (T) 1 α ) subject to d n,h c n,h + f n,h + s n,h + p n,h c n,h C + f n,h F n,h + s n,h S n,h + p n,h P = e n,h γ l C h c n,h γ u C h δ l C h n N (s),h=1,...,6 c n,h δ u C h p n,h π p n,h p n,h 1 β p n,1 p pred(n),6 β n N (s),h=1,...,6 e n,h = e s c s q α z n In the above program all variables are non-negative. SLIDE 19

Numerical Results The basic model defined above will be adapted to two application examples: pricing supply contracts (swing option), real options (power plant) and risk management. Even in this basic model, the number of possible applications and parameter studies is huge - disregarding different approaches to modeling underlying uncertainty (different scenario trees), i.e. only one specific tree was used: 184 stages, 44712 nodes, 426 scenarios, 12 dimensions (6 spot, 6 demand). SLIDE 20

Numerical Results - Implementation Workflow, Simulation/Estimation: MatLab R2007a (7.4) Scenario Generator: MatLab Model Generator: Python (Multi-stage) Modeling: AMPL Solver: MOSEK 4 (LP IPM), parameter tweaked Intel(R) Pentium(R) 4 CPU 3.00GHz 4 GB RAM Debian Stable (Etch) SLIDE 21

Numerical Results - Main parameters Risk Parameters: α = 0.85, κ = 1 EEX Future Prices 07/2007 08/2007 09/2007 10-12/2007 41.88 38.78 41.81 48.2 63.42 62.11 63.86 70.1 Supply Contract: Contract Price: 70 EUR/MWh (Total) Factor Upper/Lower: δ = (0.9, 1.1) (Daily) Gamma Upper/Lower: γ = (0, 0.025) SLIDE 22

Results - Supply contract (without γ) SLIDE 23

Results - Supply contract (without γ) SLIDE 24

Results - Supply contract (with γ) SLIDE 25

Results - Supply contract (with γ) SLIDE 26

Results - Supply contract (with γ) SLIDE 27

Results - Supply contract (with γ) SLIDE 28

Results - Supply contract (with γ) SLIDE 29

Results - Supply contract (with γ) SLIDE 30

Results - Supply contract (with γ) SLIDE 31

Pricing Supply Contracts The aim is to price a energy supply contract for a large energy consumer. The contract is issued by a energy broker, that obtains energy from the EEX (spot and future markets). The price is chosen such that the AV@R α of the expected costs is lower than µ. The supply contract has to cover all the (stochastic) energy demand d t,h. Nominal consumption is limited by upper and lower bounds for every hour block. Consumption that exceeds these limits is priced at a higher price X. The consumption of energy has to be matched by the energy bought on the spot and the future markets. SLIDE 32

Pricing Supply Contracts - Model The aim is to minimize the price of the contract C. The overshooting over the maximum allowed consumption ν h is measured with the variable x n,h [d n,h ν h ] + = x n,h The expenditure in every node is given by e n,h = f n,h F n,h + s n,h S n,h d n,h C x n,h X The AV@R α constraint reads qα + n N (T) P s(n) z n 1 α µ SLIDE 33

Pricing Supply Contracts - Model minimize C + n N,h=1,...,6 x n,hx subject to d n,h f n,h + s n,h f n,h F n,h + s n,h S n,h d n,h C x n,h X = e n,h d n,h ν h x n,h n N (s),h=1,...,6 e n,h = e s µ c ( s q α z n q α + ) P s(n) z n n N (T) 1 α Besides the minimal price the model yields an optimal hedge in terms of EEX futures. SLIDE 34

Pricing Supply Contracts - Results SLIDE 35

Results - Power Plant (real option) Stylized Power Plant: Cost of production: 50 EUR/MWh Minimum production per hour block: 0 Maximum production per hour block π: 10-40 Maximum change of production from hour block to the next: π/5 SLIDE 36

Results - Power Plant (real option) SLIDE 37

Results - Solver Run-Time Size of LPs and run-time with our specific scenario tree: Power Plant No No Yes Contract Gamma No Yes Yes Constraints 541710 809982 1346524 Variables 805687 805687 1342230 Nonzeros 2036883 3860207 31689184 Solution Time [sec] 450-700 1000-5000 13000-19500 Pricing Supply Contracts: 1073140 variables, 1073952 constraints, 2242173 non-zeros, 1500-2500 seconds SLIDE 38

Thank you for your attention Content of this talk appeared as: R. Hochreiter and D. Wozabal. A multi-stage stochastic programming model for managing risk-optimal electricity portfolios. Handbook of Power Systems II. Volume 4 of Energy Systems: 383-404. Springer, 2010. Download at: http://dx.doi.org/10.1007/978-3-642-12686-4_14 SLIDE 39

Thank you for your attention Ronald Hochreiter Department of Finance, Accounting and Statistics Institute for Statistics and Mathematics email: ronald.hochreiter@wu.ac.at URL: http://www.hochreiter.net/ronald/research/ WU Wirtschaftsuniversität Wien Augasse 2 6, A-1090 Wien SLIDE 40