Risk assessment and management of electricity markets: A review with suggestions

Abstract

Power industry deregulation has changed the determination of electricity prices from administration approval to market clearing. Affected by multiple random factors, the market prices may fluctuate sharply or significantly increase under extreme conditions, jeopardizing the normal operation of markets. In order to effectively deal with market risks, it is essential to develop the corresponding risk-control mechanisms, especially for spot market pilots. Therefore, this paper presents an overview on the risk assessment and management schemes which are widely used in the electricity markets. First, the key issues for evaluating market risks through inherent uncertainties and market power are summarized, including analysis models and quantitative metrics. Moreover, a comprehensive review of risk management and market supervision in typical electricity markets is presented. Specifically, a multi-time risk-control framework utilized by regulators is introduced to demonstrate the available schemes to reduce market risks. In addition, the various derivative contracts and portfolio optimizations are reviewed to help market participants hedge against market risks. Finally, suggestions for the development of risk management measures in spot market pilots are proposed. The summarized experience in this paper can provide useful references and guidelines for developing risk-control mechanisms in electricity markets.