Stochastic Models, Indices & Optimization Algorithms for Pricing & Hedging Reliability Risks in Modern Power Grids

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New Jersey
Project Term:
09/28/2020 - 09/27/2023

Critical Need:

The grid relies on conventional bulk power plants to provide the flexibility to operate power systems reliably. These assets can guarantee available capacity except in rare events. The existing risk management strategy protects against those rare events and aligns well with conventional technologies. New risk management strategies are needed due to the shift in grid resources: intermittent renewable resources, distributed energy resources, and storage technologies. Management systems must be able to leverage all capabilities of these new technologies to maintain an economical and reliable grid. PERFORM projects aim to address that need by developing methods to quantify and manage risk at the asset and system levels for the grid.

Project Innovation + Advantages:

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.

Potential Impact:

PERFORM projects will design methods and risk scores to clearly communicate the physical delivery risk of an energy asset’s offer and design grid management systems that organically capture uncertainty. These management systems will evaluate and hedge the system risk position to meet or exceed a baseline system risk index. This pursuit will achieve the following area impacts:


Optimal utilization of renewable and clean resources for all grid services improves grid reliability, reduces energy imports, and provides a sustainable path to energy independence.


When low- or zero-emission assets provide all grid products and services, grid operations are no longer reliant on legacy, carbon-heavy centralized generation assets, which enables the grid to absorb more clean resources.


Innovation in grid management will reduce consumer costs, increase the value of emerging technologies, and help achieve a clean and sustainable electric power sector. Merging risk techniques in power systems with those from finance and actuarial science enables further economic growth and redefines the role of electric power sector entities.


ARPA-E Program Director:
Jonathan Glass
Project Contact:
Prof. Rene Carmona
Press and General Inquiries Email:
Project Contact Email:


University of California, Santa Barbara

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