Welcome to a midterm seminar at the Department of Computer and Systems Sciences (DSV) on January 20, 2023.

Respondent: Farzad Hassanzadeh Moghimi, DSV
External reviewer: Will Usher, KTH
Internal reviewer: Rahim Rahmani, DSV
Main supervisor: Afzal Siddiqui, DSV
Supervisor: Aron Larsson, DSV

Abstract

Deep decarbonisation of the power sector necessitates increased adoption of variable renewable energy (VRE) capacity such as wind and solar. Despite its provision of virtually emission-free power at zero operating cost, VRE increases the intermittency of production. Consequently, there will be a further need for variation management based on storage, transmission, and demand-side resources.

In this respect, the Nordic countries seem well positioned to manage the sustainable-energy transition with their existing flexible capacities, viz., hydro reservoirs. However, in a deregulated electricity industry, flexible producers’ incentives are not necessarily aligned with society’s. These conflicting incentives stem from the enhanced leverage that flexible producers may exploit in a future power system with expanded VRE output. For example, large power companies may own sufficient flexible capacity to be able to manipulate electricity prices via their generation. Moreover, CO2 pricing and the advent of prosumers, i.e., agents that both consume and produce electricity, may interact with firms’ strategic behaviour under high VRE penetration to exacerbate undesirable economic or environmental outcomes.

We take a game-theoretic approach that captures agents’ behaviour in a VRE-dominated power system to address how strategic incentives interact with climate policy. In particular, we assess the impact on social welfare and CO2 emissions of (i) market power in the current Nordic power system, (ii) prosumers with VRE output and flexible demand in a future Nordic power system, and (iii) climate policy comprising a high CO2 price and expanded VRE capacity. Hence, via detailed problem instances underpinned by a game-theoretic model, we generate policy insights to support a welfare-enhancing transition to a flexible renewable power system.