Regulation as a Input for Energy Systems Design and Analysis

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Obtaining valuable energy services with less environmental impact is a crucial goal of engineering and science, but these developments must be economically viable in order to be adopted. I propose to build on the solid foundation laid in my earlier discovery grants to consider the impact of regulation and policy, as well as market prices, on plant operation and construction decisions. I will close the loop to see the impact of the resulting optimal build/operate decisions on market price processes. The research program proposed here is divided into four interrelated themes.*******The first theme, "New Regulations to mitigate the impact of Green Energy on the Power System", investigates the impact of a regulation which penalizes wind power producers who aren't able to deliver promised power. This will mitigate the impact of producers who use the certainty of obtaining a fixed feed in tariff to always offer power into the grid. This new regulation could encourage investment either in energy storage or in better wind forecasts. The question is, which alternative? We investigate this question using increasingly sophisticated models of the power system, the storage facility and the forecast. The outcome will be to reduce unintended consequences for market regulators contemplating these new rules.*******The second theme, "Understanding the impact of changing regulations on real energy options", investigates the way in which owners of energy infrastructure respond to the knowledge that regulations, for instance those governing subsidy levels, will change unexpectedly. It also investigates the implication of this for investors contemplating the development of new assets. This work fits with the idea that the stability of a regulatory regime may be more important than the current nature of the regulations.**********Subsidy levels and market prices and the processes which generate market prices unexpectedly change. Using a Hidden Markov Model approach, the third theme, "Trading Strategies on Spreads with more sophisticated stochastic processes" investigates the impact of this model risk both on financial traders of energy spreads and those who trade spreads by virtue of owning energy infrastructure.*******The fourth and final theme, "Understanding the feedback loops between price and production", combines themes two and three to understand the connection between the optimal market entry for real options - based infrastructure investors and price formation. Ideas of how regulation might damp market volatility might arise from this area.*******Overall the research described here will provide a better understanding of the connections between regulatory incentives and building decisions and between building decisions and markets. These ideas will spur the development of more accurate, or more robust, long term pricing models and real options-based decision tools. These models will allow energy real options to reach their full potential.***