Princeton University

Modern electricity markets face new sources of uncertainty and risk due to a growing adoption of renewable resources, such as wind and solar power. Princeton will quantify the impact of uncertainty on daily system operation and will ascribe risk and costs to each asset’s contribution to overall system cost. The team will develop methods to quantify the stochasticity and variability in load, renewable generation, outages, and other uncertainties, and incorporate these to yield a probabilistic distribution of the system-wide operational cost. The resulting cost is aggregated into a monetary system risk index, which is then allocated back to each asset and load according to its contribution to system risk. This allocation is based on the concept of capital allocation used in the insurance and finance sectors and will facilitate the development of reliability hedging products and securitization. Princeton will adapt the science of risk measures, credit ratings, and actuarial products to quantify the impact of uncertainties on electricity market operations by developing system risk and reliability indices (akin to the volatility index VIX or the CDX credit risk indices, respectively) as well as hedging products that can be used to transfer risks to financial markets.