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research article

Multistage stochastic portfolio optimisation in deregulated electricity markets using linear decision rules

Rocha, Paula
•
Kuhn, Daniel  
2012
European Journal of Operational Research

The deregulation of electricity markets increases the financial risk faced by retailers who procure electric energy on the spot market to meet their customers’ electricity demand. To hedge against this exposure, retailers often hold a portfolio of electricity derivative contracts. In this paper, we propose a multistage stochastic mean–variance optimisation model for the management of such a portfolio. To reduce computational complexity, we apply two approximations: we aggregate the decision stages and solve the resulting problem in linear decision rules (LDR). The LDR approach consists of restricting the set of recourse decisions to those affine in the history of the random parameters. When applied to mean–variance optimisation models, it leads to convex quadratic programs. Since their size grows typically only polynomially with the number of periods, they can be efficiently solved. Our numerical experiments illustrate the value of adaptivity inherent in the LDR method and its potential for enabling scalability to problems with many periods.

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Type
research article
DOI
10.1016/j.ejor.2011.08.001
Author(s)
Rocha, Paula
•
Kuhn, Daniel  
Date Issued

2012

Publisher

Elsevier

Published in
European Journal of Operational Research
Volume

216

Issue

2

Start page

397

End page

408

Subjects

OR in energy

•

Electricity portfolio management

•

Stochastic programming

•

Risk management

•

Linear decision rules

Editorial or Peer reviewed

NON-REVIEWED

Written at

OTHER

EPFL units
RAO  
Available on Infoscience
January 21, 2014
Use this identifier to reference this record
https://infoscience.epfl.ch/handle/20.500.14299/100040
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