Application of robust optimization theory to generation asset allocation

In the deregulated electricity market, the generation company (Genco) can sell energy through several trading choices such as the wholesale spot market, bilateral contracts and option contracts. These trading choices have different risk characteristics. To achieve a satisfactory risk-return target, the Genco should allocate the electricity among these trading choices reasonably. A robust optimization based risk management model is proposed for Genco's generation asset allocation under uncertain spot market prices. In this model, the robust profit (RP) and conditional robust profit (CRP) are used to describe Genco's profit under a certain confidence level. The objective of the Genco's generation asset allocation problem is to maximize Genco's CRP. With this method, different allocation strategies can be made for Genco's different attitudes toward risk. The Monte Carlo simulation-based numerical examples are presented to validate the reasonableness and effectiveness of proposed model.