Stochastics of Renewable Energy Markets (STORE)
Modelling and management of risk in renewable energy markets.
Vision and goals
The European energy market is undergoing a fundamental change with renewable power production from wind and photovoltaic substituting carbon intensive generation. This is referred to as the “Energiewende”. Since renewable power generation is not easily regulated, the supply-side of the market experiences a strong influence on weather conditions like wind, cloud cover, and precipitation. Traditionally, only temperature has influenced the demand-side. In the German power market, say, one observes frequent strong negative price drops (called “spikes”) as a result of over-supply of wind power (sometimes even negative prices!). Norway's hydro reservoirs may be used as batteries to store over-production of power from non-regulated renewables and balance the supply and demand better. By transmission lines, we could also offer this capacity to neighboring markets like the German.
There are many challenging mathematical problems connected to the “Energiwende», where STORE aims at contributing with solutions and new theory. The key scientists have a strong background and research interests within stochastic analysis, statistics and probability theory, competencies that are central to develop new and novel insight in risk management for the energy markets.
An example of a problem that we are concerned with in STORE is quantification of the risk in the energy market implied by wind and solar power generation. Here one first must distinguish between different market conditions, like the German and Scandinavian, where the latter has hydro reservoirs for storage available. One wants to build mathematical models for the relationship between prices and weather factors. Furthermore, the design and analysis of financial derivatives as insurance products protecting against undesirable weather conditions is a challenging area of research. In the prolongation of this, one can study the effect on the German and Scandinavian power markets from building a connecting transmission cable. Here the area of “real option theory” can be utilized as a valuation tool. There are also scientific challenges in transfer of risk in so-called re-assurance products and catastrophe bonds/derivatives. New and sophisticated stochastic processes for modelling of energy market prices and weather factors are called for. Next, highly challenging tasks within the theory of stochastic control, risk measurement, financial and actuarial pricing and hedging wait for development to answer problems of practical concern in risk management.
The research results that will come out of the STORE “Endringsmiljø” will contribute to better management of risk in energy markets with a large proportion of renewable power generation. STORE will enable Norwegian and European energy industry to better control their risk, and thereby make sure that limited energy resources are optimally used. STORE will make a significant contribution to “green energy finance”, which will give a push to a further increase of renewable energy power generation.
For a detailed research plan, please see http://www.mn.uio.no/math/english/research/groups/store/documents/