Sequential decision problems – Applications in Energy Economics

The electricity system is undergoing changes due to the increase in renewable and variable energy production, as well as the growing opportunities for optimizing electricity consumption. Additionally, more attention is being paid to the environmental impacts of energy production. This dissertation examines how dynamic optimization methods can be utilized in studying these phenomena.

The first study focuses on dynamic platform pricing for demand response services in electricity markets. It investigates how customer preferences affect the pricing of the service. In certain cases, it may be optimal to launch the demand response service with a negative price, meaning financially supporting the initial customers, and later, as the customer base grows, charging for the service.

The second study analyzes how an increase in the share of price-responsive demand affects prices and emissions in the electricity market. The simulation results of the Nordic electricity market show that the growth of price-responsive demand reduces price volatility and enhances the value of variable renewable energy production in the system. Thus, increasing demand side flexibility serves as a complementary measure alongside carbon pricing.

The third study focuses on the impact of water management measures on the production decisions and revenues of hydropower plants. Various flow restrictions can improve the ecological state of water bodies but also limit a hydropower plant's ability to respond to changes in the electricity system. The study demonstrates that the growth of flexible demand, which reduces price volatility in the electricity system, decreases the revenue loss for hydropower producers caused by flow restrictions.