Electric Power Industry Operational and Public Pol

Vol. 28, No. 11, November 2019, pp. 2738–2777 DOI 10.1111/poms.
13068
ISSN 1059-1478|EISSN 1937-5956|19|2811|2738 © 2019 The Authors. Production and Operations Management published by
Wiley Periodicals, Inc. on behalf of Production and Operations Management Society
Electric Power Industry: Operational and Public Policy

Challenges and Opportunities
Geoffrey G. Parker
Thayer School of Engineering, Dartmouth College, Hanover, New Hampshire 03755, USA, [email protected]
Burcu Tan*
Anderson School of Management, The University of New Mexico, Albuquerque, New Mexico 87106, USA, [email protected]
Osman Kazan
A. B. Freeman School of Business, Tulane University, New Orleans, Louisiana 70118, USA, [email protected]
he electric power industry is undergoing dramatic change driven by rapid technological transformation, concern over
T climate change, and evolving market structures. As a result, there is a need for new models to help the industry bet-
ter utilize resources in a time of increasing uncertainty and to help government policy makers better understand the
impacts of their regulatory decisions. We provide a structured review of the operations research and management science
literatures to describe the current operational and policy issues in the electric power industry, with a particular focus on
issues surrounding electricity market design, renewable integration, effects of climate policy on electric power infrastruc-
ture, rise of electric powered vehicles, energy storage, and the growing interdependence between natural gas and electric
power sectors. We identify the current research frontier and classify the existing research into clusters with respect to
managerial issues addressed. We offer a forecast for where the electric power industry is going and describe some impor-
tant public policy issues. Finally, we highlight research opportunities and discuss how the management science commu-
nity can contribute by considering the interaction between operational considerations and electric power policy.
Key words: electric power industry; electricity markets; energy policy; renewable energy; energy operations
History: Received: February 2018; Accepted: June 2019 by Nitin Joglekar, after 2 revisions.
of natural gas than explicit regulatory policies related

1. Introduction to coal.
The sources of and efficiency with which society uses In addition to a revolution in the cost of extracting
energy is fundamental and of the utmost importance hydrocarbons, the industry is also on the cusp of a
along a surprisingly large number of dimensions. revolution in the way that electric power is generated
Manufacturing competitiveness, economic growth, and consumed. Two forces are driving change in this
foreign policy, and environmental policy are just a sector. The first is the rapid decrease in the price of
few sectors that are directly affected by energy deci- renewable generation technology, primarily solar and
sions. In recent years, the energy industry in general wind that have generated such demand anomalies as
and the electric power industry, in particular, have the “California Duck” curve where net electricity
been subject to rapid technological change that has demanded from the central grid falls at peak solar
had major impacts. For example, natural gas fractur- production hours and then rises rapidly when the sun
ing improved so rapidly from 2005 to 2010 that the sets. The second force is the dramatic reduction in the
impact of cheaper natural gas has been felt across the cost of information and computing technology which
economy in sectors such as chemicals, manufacturing, has the promise of making electric power demand far
residential heating, and electric power. The widely more responsive to price and other control signals.
debated “war on coal” was arguably much more Indeed, in a reversal of over one hundred years of
about the hydraulic fracturing driven price reduction practice in ramping dispatchable supply to meet
demand, we may be entering an era where electricity
supply is the random variable that is addressed by
This is an open access article under the terms of the
Creative Commons Attribution License, which permits
adjusting demand to match supply. Or, more realisti-
use, distribution and reproduction in any medium, cally, we are entering an era where both supply and
provided the original work is properly cited. demand have stochastic and controllable components,
2738
Parker, Tan, and Kazan: A Survey on the Electric Power Industry
Production and Operations Management 28(11), pp. 2738–2777, © 2019 The Authors. Production and Operations Management published by
Wiley Periodicals, Inc. on behalf of Production and Operations Management Society 2739
adding to the complexity of ensuring reliable electric researchers to locate papers in relevant areas. Second,
service. and more importantly, we identify research frontiers
The rapid change on the supply side of the market, in electric power industry research, classify the exist-
for both conventional and renewable technology and ing research into clusters with respect to managerial
rapid change on the demand side because of informa- issues addressed, and discuss possibilities for future
tion technology and the potential for improved stor- work that would extend this research frontier in
age have combined to create a need for new models to directions with significant impact on practice.
help the electric power industry better utilize and We note that many papers included in this survey,
control energy and to help government policy makers particularly those on renewable energy, alternative
better understand the impacts of regulatory decisions. fuel vehicles, or carbon policy can also be categorized
We believe that the operations research and manage- under the umbrella of sustainable operations (Klein-
ment science (OR/MS) community is in a strong posi- dorfer et al. 2013). The sustainable operations litera-
tion to provide the industry with valuable decision- ture covers a wide range of issues including green
making support. product design, lean operations, green operations,
In this study, we review the OR/MS literature to and closed-loop supply chains. We refer the readers
describe current operational and policy issues in the to survey papers in this area for further information
electric power industry with the ultimate goal of on opportunities for research regarding sustainable
encouraging management science scholars to do more operations that are not covered in this paper (e.g.,
research in the area. We believe there is great poten- Corbett and Klassen 2006, Kleindorfer et al. 2013,
tial to do rigorous research that also has real impact Linton et al. 2007, Tang and Zhou 2012).
on a critical industry. One criticism of OR/MS The rest of the study is organized as follows. Sec-
research is that real life details are often abstracted tion 2 briefly describes the research methodology
away in the pursuit of creating elegant models. Our used in choosing and categorizing papers. Section 3
hope is to encourage more research that retains the discusses the current frontier in the electric power
necessary detail to be relevant in an industry context. industry research by OR/MS scholars with subsec-
OR/MS scholars have the technical capability to solve tion 3.1 providing the background information on the
problems at the intersection of business, economics, industry and subsections 3.2–3.9 focusing on electric-
and policy. Large literatures on electric power indus- ity market design, renewable integration, risk man-
try exist at both the technical and policy levels, but agement in electricity markets, climate policy,
OR/MS scholars are particularly well placed to electricity storage, hydropower operations, adoption
bridge these focal areas. Given the long history of reg- and integration of plug-in electric and hybrid vehi-
ulation and public investment, the potential for dual- cles, and natural gas industry and its impact on elec-
causality between operations and public policy deci- tric power generation, respectively. Section 4
sions (Joglekar et al. 2016) is especially strong in the summarizes the most promising research areas for
electric power industry. One motivation for this study OR/MS scholars and concludes the paper.
is, therefore, to establish a roadmap for future OR/
MS research that will take into account the mutually
interacting dynamics between operations and public
2. Methodology
policy decisions in the electric power industry. Research on the electric power industry is vast and
Our intended contribution is twofold. First, we pro- rapidly growing. Thus, our approach is informed by
vide a structured review of electric power industry previous survey papers (Anderson and Parker 2013b,
research in the last 20 years (mostly within OR/MS Krishnan and Ulrich 2001) particularly with respect to
journals) with citations to approximately 500 papers. the journals sampled and the need to narrow scope to
We focus on topics that we find to be especially rele- yield a manageable task. There are numerous aca-
vant to current operational and policy challenges, demic journals dedicated to the energy industry (e.g.,
such as electricity market design, renewable integra- Energy Policy, IEEE Transactions on Power Systems,
tion, hydropower operations, energy storage, climate Energy Economics, Energy, IEEE Transactions on Sus-
policy, risk management in the electric power indus- tainable Energy), all of which publish a high volume of
try, electrification of the transportation sector, and the articles on the electric power industry every year.
growing interdependence between natural gas and Thus, given the broad scope of this survey, we do not
electric power generation. Although this has been a attempt to provide an in-depth review of all the exist-
major undertaking, we still go over only a subset of ing work. Instead, in line with our goal of highlight-
electric power industry research in general and, for ing research opportunities for OR/MS scholars, we
feasibility, we completely omit related upstream focus on studies that appeared in select OR/MS jour-
industries such as oil and gas exploration and produc- nals. However, we also include some of the most
tion. We hope that the survey and references can help influential research that appeared in energy-specific
2740 Wiley Periodicals, Inc. on behalf of Production and Operations Management Society
journals, especially when there is limited work on a We eliminated certain papers from the obtained list,
particular topic in OR/MS journals. Also, when possi- including those that do not have a direct focus on
ble, we direct readers to other survey papers on cer- electric power industry (such as papers on telecom-
tain topics for more in-depth review of the existing munications networks), those that focus on electrical
research. Finally, since the electric power industry is engineering aspects of grid or transmission design,
rapidly changing and since our primary goal is moti- and those that study unconventional sources of
vating research that can have an impact on overcom- renewable energy such as organic waste. Next, we
ing the current challenges faced by the industry, we identified the most influential papers in each topic,
limit our review to papers published in the last using the ISI Citation Index and searched through the
20 years. references in these highly cited papers to expand our
Specifically, we thoroughly reviewed the following review. In certain areas such as electricity storage, the
journals spanning the years 1998–2018: 1) Operations number of studies published in OR/MS journals is
Research, 2) Management Science, 3) Production and very limited; thus, most of the papers we include on
Operations Management, 4) Manufacturing & Service those topics come from journals that are dedicated to
Operations Management, 5) Journal of Operations Man- the energy industry.
agement, 6) European Journal of Operational Research, 7) Next, we clustered majority of these papers into the
Mathematics of Operations Research, 8) Computers and respective research areas discussed in sections 3.2–
Operations Research, 9) Annals of Operations Research, 3.9. For each research area, we further clustered the
10) Naval Research Logistics, 11) Decision Sciences, 12) papers with respect to managerial issues addressed,
Decision Support Systems, 13) Operations Research Let- which are summarized in Tables 2–10. Papers that are
ters, 14) IEEE Transactions of Engineering Management. related to the electric power industry, but that do not
As noted above, the main areas of research we focus fall under the main research areas in sections 3.2–3.9
on are electricity market design, renewable integra- are sampled and catalogued in Table 1. In each sec-
tion, energy storage, climate policy and its effect on tion, we discuss only a small subset of the references,
the electric power industry, adoption and integration but we hope that Tables 1–10 stand alone as a guide
of plug-in electric and hybrid vehicles, natural gas to articles that are likely to be most useful to readers.
industry and its relation to power generation, hydro-
power operations, and risk management in the elec-
tric power industry. To identify potential articles, we 3. Electric Power Industry Research
searched the journal databases for the following Frontier and Potential Research
terms: “electricity,” “electric,” “wind,” “solar,”
“renewable energy,” “energy markets,” “electricity
Directions for OR/MS
storage,” “energy storage,” “electric vehicle,” “natural The incredibly challenging task of perfectly balancing
gas,” “hydro,” “hydropower,” and “hydroelectric.” the supply and demand of electricity at all times
Table 1 A Sample of Electric Power Industry Research in OR/MS Journals
Research topics Selected references

Unit commitment/Optimal dispatch models: Optimal Takriti and Krasenbrink (1999), Nowak and R€omisch (2000), Takriti et al. (2000), Takriti and
schedule and dispatch of power generation resources Birge (2000), Doorman and Nygreen (2003), Viana et al. (2003), Valenzuela and Mazumdar
(2003), Thompson et al. (2004), Sen et al. (2006), Dahal et al. (2007), Troncoso et al.
(2008), Cerisola et al. (2009), Toczy lowski and Zoltowska (2009), Corchero and Heredia
(2011), Kjeldsen and Chiarandini (2012), Murillo-Sanchez et al. (2013), Papavasiliou and
Oren (2013), Zugno and Conejo (2015), Lorca et al. (2016), van Ackooij and Malick (2016),
Zugno et al. (2016), and Morales and Pineda (2017)
Valuation and/or optimal investment level for generation, Tseng and Barz (2002), Takizawa and Suzuki (2004), Thompson et al. (2004), Tseng and
storage, or transmission assets: single-firm level Lin (2007), Boomsma et al. (2012), Thompson (2013), Farzan et al. (2015), Hu et al.
decision making, includes real options-based papers (2015), Bruno et al. (2016), Drake et al. (2016), Hach et al. (2016), Kettunen and Bunn
(2016), and Welling (2016)
Optimal capacity expansion for transmission Gardner and Rogers (1999), Singh et al. (2009), Villumsen and Philpott (2012), Feng and
networks and generation assets: long-term Ryan (2013), ONeill et al. (2013), Parpas and Webster (2014), Huppmann and Egerer
decisions by central planners (2015), Jenabi et al. (2015), Sauma et al. (2015), Tolis (2015), Grimm et al. (2016),
Georgiou (2016), Munoz et al. (2016), Pineda et al. (2016), and Pineda and Morales (2016)
Optimal operation of generation assets Nowak and R€omisch (2000), Mijangos (2005), Makkonen and Lahdelma (2006), Rong
and Lahdelma (2007), Cirre et al. (2009), Bosman et al. (2012), Kalczynski (2012), Zhang
et al. (2013), Jochem et al. (2015), and Steffen and Weber (2016)
Decision support systems for power market Georgopoulou et al. (1998), Bergey et al. (2003), Papadopoulos and Karagiannidis (2008),
policy making and operations Hunt et al. (2013), Mattiussi et al. (2014), Bertsch and Fichtner (2015), and Pinto et al.
(2015)
Table 2 Electricity Markets

Finding market equilibria in deregulated electricity Jing-Yuan and Smeers (1999), Younes and Ilic (1999), Lavigne et al. (2000), Boucher and Smeers
markets (Cournot, Bertrand, Stackelberg, or (2001), Schuler (2001), Bessembinder and Lemmon (2002), Bunn and Oliveira (2003), Bushnell
Supply Function Equilibria for spot and (2003), Garcia et al. (2005), Rudkevich (2005), Wu and Kleindorfer (2005), de Haro et al. (2007),
forward prices and generation levels) Hobbs and Pang (2007), Hu and Ralph (2007), Wang et al. (2007), Yao et al. (2007, 2008),
Anderson and Hu (2008), Bushnell et al. (2008), Wilson (2008), Holmberg (2009), Shanbhag et al.
(2011), Thompson (2013), Filomena et al. (2014), Peura and Bunn (2015), and Ruddell et al.
(2016)
Examination of market power or implicit collusion Schuler (2001), Borenstein et al. (2002), Bunn and Oliveira (2003), Bushnell (2003), Murphy and
Smeers (2005), Bushnell et al. (2008), Anderson and Cau (2009), Banal-Esta~nol and Micola
(2009), Murphy and Smeers (2010), Anderson and Cau (2011), Oh and Thomas (2013), and Peura
and Bunn (2015)
Capacity expansion in electricity markets Murphy and Smeers (2005), Wu et al. (2005), Bunn and Oliveira (2008), Murphy and Smeers
(2010), Ehrenmann and Smeers (2011), Pineau et al. (2011), Filomena et al. (2014), Bunn and
Oliveira (2016), and Oliveira and Costa (2018)
Effect of transmission costs and Younes and Ilic (1999), Kattuman et al. (2004), Daxhelet and Smeers (2007), Contreras et al.
constraints on market behavior (2009), Liu and Nagurney (2009), Downward et al. (2010), Ruddell et al. (2016), and Holmberg
and Philpott (2018)
Electricity pricing in markets with nonconvexities O’Neill et al. (2005), Bjørndal and Jornsten (2008), Araoz and J€ornsten (2011), Liberopoulos and
Andrianesis (2016), and Fuller and Celebi (2017)
Optimal level of generation to offer Anderson and Philpott (2002), Neame et al. (2003), Pritchard and Zakeri (2003), Kian and Cruz
to the market (i.e., optimal bids) (2005), Triki et al. (2005), Fleten and Kristoffersen (2007), Aparicio et al. (2008), Beraldi et al.
(2008), Corchero and Heredia (2011), Kim and Powell (2011), Boomsma et al. (2014), and
Steeger and Rebennack (2017)
Bidding behavior, auction design and Mount (2001), Singer (2002), Schummer and Vohra (2003), Elmaghraby (2005), Hortacsu and
implementation Puller (2008), Meeus et al. (2009), Morales et al. (2014), Fabra and Reguant (2014), Reguant
(2014), Derinkuyu (2015), and Madani and Van Vyve (2015, 2018)
Electricity market design and its effect Lavigne et al. (2000), Kleindorfer et al. (2001), Cramton and Stoft (2005), Bunn and Oliveira
on economic and environmental outcomes (2008), Milligan and Porter (2008), Ehrenmann and Neuhoff (2009), Zhao et al. (2010), Chen et al.
(2011), Ehrenmann and Smeers (2011), Muratore (2011), Cramton et al. (2013), Rosen and
Madlener (2013), Morales et al. (2014), Franco et al. (2015), Jiang et al. (2016), Hach et al.
(2016), K€ok et al. (2016), Pineda et al. (2016), Ritzenhofen et al. (2016), and Siddiqui et al.
(2016)
Electricity tariffs and demand response Oren (2001), Kamat and Oren (2002), Pettersen et al. (2005), Baldick et al. (2006), Sueyoshi and
Tadiparthi (2008), Hatami et al. (2009), Ding et al. (2012), Latifoglu et al. (2013), Puller and West
(2013), Zakeri et al. (2014), Tsitsiklis and Xu (2015), Ata et al. (2016), K€ok et al. (2016),
Lohmann and Rebennack (2016), Str€ohle and Flath (2016), Valogianni and Ketter (2016), Dong
et al. (2017), Garttner et al. (2018), and Schlereth et al. (2018)
Net metering Darghouth et al. (2011), Cai et al. (2013), Borlick and Wood (2014), Costello and Hemphill (2014),
Eid et al. (2014), Hu et al. (2015), Satchwell et al. (2015), Darghouth et al. (2016), Castaneda
et al. (2017), and Gagnon et al. (2017)
opens up many research questions that can be optimization methodologies used in energy research,
addressed with the tools and techniques of OR/MS. see Banos et al. (2011).
Indeed, the electric power industry research has long Since the goal of this study is to highlight research
been an important stream in OR/MS scholarship. The opportunities related to the recent changes and chal-
most well-studied topics include capacity invest- lenges in the electric power industry, we do not pro-
ments in generation assets, optimal scheduling and vide a detailed review of all these actively studied
dispatching of power generation resources, electricity topics. Instead, after providing basic definitions in
market design and its effect on economic and environ- section 3.1, we discuss several key areas that present
mental outcomes, optimal bids by generation assets in the most relevant and current research problems for
forward markets, equilibrium behavior of electricity OR/MS scholars. Table 1 provides a sample of refer-
markets in terms of prices, production, emissions, ences for topics that are not thoroughly discussed in
and capacity investments, and optimal operation of the review.
generation assets. These topics are addressed with a
wide range of methodologies including dynamic pro- 3.1. Definitions and Background Information
gramming, stochastic programming, mixed-integer Historically, electricity has been generated and dis-
programming, stochastic equilibrium models, tributed in markets regulated by public utility commis-
dynamic games, robust optimization, and agent- sions. In the regulated markets, vertically integrated
based simulations. For a review of common utilities own the electricity supply chain from
generation to the end-customer. Because electricity wholesale electricity price. Independent System Oper-
rates are set by the public utility commissions, these ators and Regional Transmission Organizations (ISO/
markets provide price stability and long-term certainty. RTO) are the market makers in deregulated markets.2
However, consumer choice is restricted because utilities They independently operate, monitor, control, and
in regulated markets are natural monopolies. Since the coordinate the operation of the electric power system
1990s, there has been a movement toward energy and provide open and non-discriminatory transmis-
deregulation (or restructuring) around the world. sion access to all generators, utilities, and other mar-
Deregulation at the wholesale (i.e., generation) level ket players.
means that independent power producers own genera- ISO/RTOs commit the generators with the lowest
tion assets and compete in the wholesale electricity price offers (bids) based on the needed demand for
market to sell electricity. Deregulation at the retail level the next operating day to provide adequate notice of
means consumers can choose to purchase electricity generation expectations. This results in 24-hour clear-
from suppliers other than the incumbent utility. ing prices, which are also called the day-ahead market
Although the rising prices and the California electricity prices, providing some level of price certainty. Real-
crisis of early 2000s paused deregulation efforts in some time market with intra-day prices is formed as each
states, more than two thirds of the electricity demand individual hour approaches during the operating day
in North America is served by deregulated markets to balance actual load and system constraints. Since
today.1 Similar trends have been observed around the the intra-day prices are not known until the full hour
world including the majority of European countries, has passed, there is higher price volatility in this mar-
and many Asia-Pacific countries such as Australia, ket. The spread between day-ahead prices and intra-
New Zealand, Singapore, Japan, and South Korea. day prices is called day-ahead real-time spread, which
The power grid is among the most complex techno- is an indicator of how well the price settlement system
logical systems built by humans. It serves to distribute is managed. The difference between actual and sched-
electricity from generators to consumers with mini- uled generation is called as the power generation imbal-
mum energy loss while maintaining reliability and ance. Imbalance price is the matching price in a
established service levels. This requires a hierarchical settlement period for this imbalance, which can be
voltage structure, where power is generated with negative, positive, or zero. ISO/RTOs determine the
higher voltages, then distributed to consumers with rule to calculate the imbalance price either from the
lower voltages. Ancillary services balance power gener- generator to the regional transmission operator, or the
ation and consumption in real time. These services other way around. This process incentivizes genera-
(e.g., frequency regulation, voltage support, contin- tors and ISO/RTOs to meet the system load as effi-
gency reserves, power storage, etc.) respond to power ciently as possible.
grid fluctuations due to faults during power genera- ISO/RTOs are responsible from making sure that
tion and distribution, as well as sudden demand there are adequate generating resources to meet the
shifts due to human activity and weather conditions. daily demand curve plus a predetermined operating
Power systems face the problem of determining a reserve as a percentage of this demand. To achieve this
generation schedule to meet the load at the lowest purpose effectively and efficiently, reserve markets
cost possible subject to a large number of operational and, in some regions, capacity markets are established.
constraints. There are two related short-term opti- In a capacity market, producers are rewarded for
mization models for this purpose. Unit commitment building installed capacity whereas the reserve mar-
models determine when (and which) generating units ket deals with ensuring supply-demand balance at a
will be turned on and off. Its solution commits the shorter time scale.
most efficient units first, followed by next efficient, In electricity markets, forward and future contracts
and so on. By its nature, this is a sophisticated combi- are as essential as the immediate delivery through the
natorial optimization problem. Economic dispatch mod- spot market (i.e., the “real-time market”). A forward
els determine the individual generation output for contract is an over-the-counter agreement between
each scheduled unit to meet the system load subject two companies where one party is obligated to buy
to various operational and transmission constraints. and the other to sell a specified quantity at a fixed
Solution algorithms for these problems have long price on a given date in the future. Future contracts
been an important area of research for OR/MS schol- are similar, but with the important distinction that
ars. In deregulated markets, electricity is generated they are traded on exchanges, making them standard-
and sold on the wholesale level before it is transmitted ized contracts. Forward and future contracts help
to retail customers. For this reason, a wholesale mar- market participants hedge their price risk. Market
ket is established between market players either for participants may also use these contracts for specula-
their own use or for selling power to their retail cus- tion; that is, they may increase their exposure to price
tomers. Competitive bids on contracts set the risk in exchange for a risk premium.
There are several structural differences between the storage, plug-in vehicles, and demand response as
US and European electricity markets. Pool models in well as technologies such as PV inverters that support
the United States are central dispatch models, which the provision of ancillary services (Sioshansi 2014).
enable generating companies to offer price-quantity Future steps regarding the realization of the smart
pairs for the power supply in day-ahead or intra-day grid vision will need input from a variety of fields,
settings. In most of Europe, however, power exchanges3 including OR/MS.
were set up to offer day-ahead and intra-day trade The OR/MS field has a long history of building
between generators and distributors, as well as energy market models to provide decision support
among generators as a bilateral trade model. Power for policy makers (Hogan 2002). After the restructur-
exchanges help enable price transparency, optimize ing of the markets in 1990s, there has been significant
trading portfolios, and eliminate generation imbal- interest in electricity market modeling. Earlier work
ance. Bidders in these exchanges place generation in this area started off by building game theoretic
portfolio-based bids, while central pool models pro- models in order to investigate the strategic behavior
cess unit level bids. Most of the US electricity markets in the newly restructured markets, including the for-
are deregulated, where Nodal pricing (also known as mation of spot and forward prices, the equilibrium
locational marginal pricing) is used. In other words, the levels of supply from different generation technolo-
marginal cost of the hypothetical consumption of one gies, capacity investments at equilibrium, the effect of
additional kilowatt-hour is calculated at each node of market power on these equilibria and the potential for
the grid in these markets. In contrast, the European collusion and market manipulation (see the first row
electricity market is zonal, where bidding and trading in Table 2). Since these models tend to be highly com-
may be limited by the cross-border capacity between plex, a significant contribution by OR/MS scholars
zones. Transmission congestion contracts allow mar- has been providing methodological advancements for
ket participants to hedge the risk of price changes dri- the computation of equilibria (e.g., Anderson and Hu
ven by transmission capacity constraints (Adamson 2008, Gabriel et al. 2009, de Haro et al. 2007, Hobbs
et al. 2010). In the European market, day-ahead prices and Pang 2007, Hu and Ralph 2007, Shanbhag et al.
play the most important role, whereas intra-day 2011, Wilson 2008, Yao et al. 2008).
prices in the US markets are the real-time, final mar- Electricity pricing has always been at the core of
ket prices. A review of electricity market organization electricity market research (e.g., Banal-Esta~ nol and
in Europe, including futures, spot, day-ahead, intra- Micola 2009, Garcia et al. 2005, Joskow and Wolfram
day, and imbalance markets are provided by 2012, Lavigne et al. 2000, Peura and Bunn 2015, Wang
Tanrisever et al. (2015) and a comparison of US and et al. 2007, Yao et al. 2007). In deregulated markets,
European markets is provided in Cramton (2017). suppliers of electricity submit their price and quantity
bids to a market operator who determines the optimal
3.2. Electricity Markets dispatch and the resulting payments to the suppliers.
The electric power industry is going through dramatic There is a strong body of research that studies the
changes from the fall of natural gas fuel prices to the design and implementation of auctions in these mar-
increasing deployment of renewable energy. There is kets looking at various aspects, such as bidding
one overarching research question related to all of behavior, computation of market clearing prices, and
these changes: How to redesign the grid and electric- the efficiency of the resulting dispatch (e.g., Derin-
ity markets to help society transition to a cleaner and kuyu 2015, Elmaghraby 2005, Madani and Van Vyve
more efficient electric power industry? It is widely 2015, Meeus et al. 2009, Oren and Ross 2005, Pritch-
agreed that the current electricity grid is inadequate ard and Philpott 2005, Reguant 2011, 2014, Schummer
to support such transition. Over the last decade, there and Vohra 2003, Singer 2002, Toczy lowski and Zol-
has been a growing interest in “smartening the grid” towska 2009).
by taking advantage of the improvements in One highly discussed issue after the transition to a
advanced information and communication technolo- competitive electricity market is under what condi-
gies. The smart grid vision entails making the grid tions “energy only” payments are enough for generat-
more efficient and reliable through the use of sensors, ing firms to recover their fixed costs. Traditional
smart meters, and other technologies that facilitate marginal cost pricing may be problematic in the elec-
system monitoring to optimize efficiency and enable tric power industry, because total costs for power
self-repair (Koenigs et al. 2013). Smart grid also plants tend to be non-convex due to factors such as
encompasses the development of new standards and start-up costs, shut down costs, and minimum supply
market mechanisms that can support not only renew- requirements, which make the marginal costs smaller
able integration but also the integration of other dis- than the average costs. As a result, some firms may
tributed energy resources, defined as small-scale units of fail to recover their costs through energy payments
grid-connected local generation, such as electricity (i.e., payments for electricity delivered to the grid)
only, which is known as the “missing money” prob- both new and existing capacity. Their results show
lem (e.g., Cramton et al. 2013, Joskow 2006). Various that, contrary to what critics of capacity markets sug-
alternatives to marginal cost pricing have been pro- gest, a capacity market can actually lower the total bill
posed in the OR/MS literature (see the discussion of electricity generation for customers as it can reduce
and references in Araoz and J€ ornsten 2011, Bjørndal the potential to exercise market power. Yet, they also
and Jornsten 2008, Liberopoulos and Andrianesis argue that capacity markets should only be intro-
2016 and O’Neill et al. 2005). Some of these alterna- duced if the market is relatively close to a capacity
tives are based on elevating the payments above the shortage. The problems related to redesigning elec-
marginal cost, whereas others involve side payments. tricity markets to support renewable integration (or
The missing money problem is an active area of dis- the integration of other distributed energy resources)
cussion in the electric power industry. There is an is certainly not limited to the design of capacity or
increasing concern that liberalized electricity markets energy only markets. We refer readers to Hiroux and
do not provide sufficient incentives to build adequate Saguan (2010), Milligan et al. (2014), Hu et al. (2018)
generation capacity (Cramton et al. 2013). Wholesale for more detailed summaries of market design issues
electricity markets have price caps that constrain how related to renewable integration, and to Ventosa et al.
much generating units can make during times of sup- (2005) for a review of electricity market modeling
ply scarcity. As a result, the existing pricing schemes trends. OR/MS scholars can contribute to this discus-
may not adequately reflect the value of investment in sion of electricity market design by extending the
the necessary resources. Many argue that generating existing methods in several directions, including
units need to receive compensation for their capacity more comprehensive treatment of market and techno-
in addition to the energy payments they receive by logical uncertainties, and consideration of distributed
selling electricity (Cramton and Stoft 2005). These pay- energy resources.
ments are handled in a capacity market. A capacity One of the much-discussed goals in the power
market supplements the revenues a generator can get industry is increasing demand response, that is incen-
from the energy and reserves markets, encouraging tivizing consumers to reduce their electricity usage
further capacity investments to ensure future resource during peak periods (for a literature review, see Siano
adequacy. Several countries around the world (e.g., 2014). The obvious and arguably most significant ben-
Colombia, UK, Germany) and several ISO/RTOs in efit from demand response is the reduced need for
the United States (e.g., PJM, MISO, NYISO) have been peak capacity. In addition, demand response can also
experimenting with capacity markets. be used as a solution to mitigate the effects of supply
Large scale integration of wind and solar will likely fluctuations, which can be a significant benefit in sce-
exacerbate the missing money problem since these narios with high percentage of intermittent (variable)
resources tend to depress spot electricity prices, mak- energy resources such as wind and solar. In one of the
ing it even more difficult to adequately compensate few OR/MS papers that incorporate demand
generation resources. There has been much discus- response, Str€ ohle and Flath (2016) study this benefit
sion related to market designs that spur adequate and design a local market mechanism for matching
investment into conventional generators as well as flexible demand and uncertain supply. Valogianni
renewables (Cramton et al. 2013, Cramton and Stoft and Ketter (2016) discuss the design of effective
2005, Joskow 2006, 2008, Milligan et al. 2014, Pritch- demand response programs based on a real-world
ard et al. 2010). OR/MS scholars have also made con- pilot program. Other OR/MS work in this area focus
tributions in this area. For example, Morales et al. on the design and valuation of interruptible service
(2014) and Pritchard et al. (2010) propose energy-only contracts4 (Baldick et al. 2006, Hatami et al. 2009,
market designs that account for intermittent genera- Oren 2001), design of energy buy-back programs to
tion by wind and solar plants. Ehrenmann and reduce peak demand (Ding et al. 2012), and consumer
Smeers (2011) compare the investment behavior level decision making (Zakeri et al. 2014).
under energyonly and capacity-only markets taking Despite the well-known benefits of demand
risk and risk aversion into account. Jiang et al. (2016) response and despite the advancements in smart
develop capacity metrics that can be used to quantify meters and incorporation of demand response pro-
the capacity contribution of intermittent generators as grams in several utilities, the full potential of demand
well as storage resources by using an envelope-based response has not been realized. One essential step to
modeling method adapted from network calculus increase demand flexibility is to shift from flat rate
used in telecommunications research. Hach et al. electricity tariffs to tariffs that better reflect the vary-
(2016) develop dynamic capacity investment models ing cost of electricity, such as time-of-use pricing and
to assess the effect of different capacity market design real-time pricing. Joskow and Wolfram (2012) discuss
options including no capacity markets, capacity mar- opportunities and challenges in introducing dynamic
kets for only new capacity and capacity markets for pricing. When achieved in large scale, a shift to
Table 3 Electricity Markets Open Questions
Electricity markets open research questions
Operational Policy
What is the potential impact of dynamic electricity pricing on capacity How can a platform market for the electric power industry be developed
investments, demand response adoption, emission levels, and technology to improve the integration of distributed energy resources into electricity
mix of electricity generation portfolios? distribution systems?
How do different rate structures for net metering affect renewable energy During the platformization of the grid, how should utility business models
capacity investments? be revised to avoid the utility death spiral?
How do different electricity tariff structures affect demand response? How can the missing money problem be solved such that the market
provides the necessary incentives to build adequate generation capacity?
Can “energy-only” designs be sufficient or are capacity markets a
necessary part of the design?
How should unit commitment models and market clearing algorithms be What kind of electricity tariffs would be ideal to reflect the varying cost
adjusted in European markets to better handle the market coupling of electricity?
among interconnected power systems? How does large-scale integration
of renewables factor into these adjustments?
dynamic pricing can have profound effects on long without controversy. Arguably, net metering at full
term capacity investments by utilities, technology mix retail electricity price allows distributed generation
of electricity generation portfolios, and environmental owners to avoid their full share of fixed utility infras-
outcomes, such as emissions. There is a burgeoning tructure costs, which could trigger utilities to increase
interest from the OR/MS community to look at the retail prices in order to recover these costs (Borlick
effects of different electricity tariffs (e.g., Ata et al. and Wood 2014). Higher prices might further encour-
2016, Dong et al. 2017, K€ ok et al. 2016). The antici- age distributed generation adoption, creating a feed-
pated advancements in grid digitization will make it back loop (Cai et al. 2013, Costello and Hemphill
possible to adopt more granular pricing schemes (i.e., 2014, Darghouth et al. 2016). There is an ongoing dis-
real-time pricing) in the future. Ito (2014) shows that cussion on the possibility of a “utility death spiral”
in a nonlinear pricing scheme, consumers tend to with the idea that declining profits as a result of dis-
respond to average price rather than marginal or tributed energy resources would diminish the ability
expected marginal price, likely because the cognitive of electric utilities to survive (e.g., Castaneda et al.
effort required to understand complex pricing is pro- 2017, Costello and Hemphill 2014, Eid et al. 2014,
hibitively high. However, this response pattern may Satchwell et al. 2015). Although theoretically possible,
change with the introduction of smart home systems many argue that the utility death spiral is unlikely as
that track and display consumption and pricing infor- utilities would find a way to work with regulators to
mation in real time and can take action on behalf of ensure their viability (Costello and Hemphill 2014,
building owners according to their preferences. Eid et al. 2014). Nonetheless, it is generally agreed
Together with the advancement of distributed energy that there are many economic and institutional impli-
resources, the increased demand elasticity may take cations of the move toward a decentralized power
us to a power system where demand follows supply industry that need to be thoroughly discussed.
rather than supply following demand, but such pro- Though there are important discussions on net meter-
found change can only happen with a complete make- ing in energy policy circles (Cai et al. 2013, Darghouth
over of the grid. et al. 2011, 2014, Eid et al. 2014), the topic is not exten-
One step toward the advancement of distributed sively studied in the OR/MS literature. One exception
generation (such as rooftop solar PVs) has been net is Hu et al. (2015), who incorporate the effect of net
metering programs. Net metering (or net energy metering programs on the optimal renewable energy
metering) is a practice that credits owners of dis- capacity investment at firm level. They show that
tributed generation units for the electricity they add optimal capacity investment indeed increases with
to the grid. Net metering can significantly reduce the the net metering rate, especially if the rate goes above
payback period for acquiring a distributed generation 60% of the retail electricity price.
unit (Gagnon et al. 2017); as a result it can encourage The electric power industry can learn from plat-
further market penetration of distributed energy form markets in the anticipated transformation pro-
resources. However, the net effect of these programs cess. A platform is essentially a business ecosystem
on distributed energy deployment is highly sensitive that exploits two-sided network effects (Parker and
to the rate structure (Darghouth et al. 2016). Van Alstyne 2005, Rochet and Tirole 2003) to match
Net metering programs are welcomed by renew- producers and consumers who wish to transact
able generation advocates, but their adoption is not (Eisenmann et al. 2006, Parker et al. 2016). The grid of
the future is likely to evolve as a platform that will as at night when wind is strong but demand is low)
bring together providers of distributed energy and later be discharged when needed. Though cur-
resources and consumers of electricity. A platform rently not in wide-spread use (for reasons we discuss
market can improve the integration of distributed in section 3.6), electricity storage is on the verge of
energy resources into the planning and operation of becoming a viable and economically attractive alter-
electricity distribution systems through reduced native in facilitating renewable integration (e.g., Fer-
transaction costs, improved provision of price fore- tig and Apt 2011). Finally, it is possible to mitigate the
casts, data analytics, and other smart technology ser- effects of variability in wind power by combining the
vices (Tabors et al. 2016). For example, a platform output of multiple wind farms in different geographi-
market would advance the adoption of electricity cal locations since a decrease in output in one location
storage by facilitating more granular pricing that may be offset by an increase in another (e.g., Katzen-
reflects the location- and time-specific value of vari- stein et al. 2010). The wider geographical space of US
ous services offered by storage. Such integration can markets might make it easier to take advantage of this
potentially result in better system efficiencies, more averaging effect compared to geographically smaller
affordable and reliable service, and a climate-friendly and more fragmented markets found in Europe.
energy system. It would also involve dramatic There is growing practitioner and academic research
changes to the current business model of utilities on the optimal design of wind farms (as well as
(Burger and Luke 2016, Sioshansi 2014, The MIT hybrid wind and solar systems) to take advantage of
Energy Initiative 2013), which opens up many this spatial diversification effect. For example, Qu
research questions for OR/MS scholars (see Table 3 et al. (2015) develop a Bayesian statistical model for
for a summary of open research questions). learning unknown correlation structures that can be
used to optimize wind farm placement; Le Cadre
3.3. Renewable Integration et al. (2015) use a game theoretical electricity market
Renewable energy production has increased signifi- model to find efficient wind farm portfolios; Thomai-
cantly in the last decade, both in the United States dis et al. (2016) study Pareto-optimal configurations
and around the world. Wind and solar installed of wind and solar power plants, Elberg and Hagspiel
capacity has doubled roughly every three years on (2015) show the importance of spatial dependencies
average over the past 30 years (Trancik 2015). Increas- among wind generation resources in determining the
ing use of intermittent renewable generation such as market value of wind power projects, and Cranmer
wind and solar brings a host of new challenges to grid et al. (2018) incorporate environmental objectives into
operators and creates new avenues of research for their model for siting offshore wind farms.
OR/MS scholars (see Table 4 for a summary of exist- Another challenge related to renewable integra-
ing research and open questions in this area). tion is transmission constraints. Wind and solar
The main challenge of increased renewable genera- farms are typically built in remote locations far
tion is the “intermittency” of wind and solar genera- away from population centers. That means adding a
tion. Intermittent energy resource means that the significant amount of renewable energy to the
energy resource is not continuously available to gen- power grid requires building massive transmission
erate electricity. Wind and solar energy are intermit- lines. Studying the impact of these transmission
tent because solar energy is not available at night, and constraints on renewable integration is an important
wind energy is not available when the wind does not area of research (e.g., Fischlein et al. 2013, Papavasil-
blow. Intermittent resources are considered to be non- iou and Oren 2013, Qi et al. 2015, Sioshansi and Short
dispatchable since their output cannot be increased or 2009). An ongoing discussion in this area is how
decreased quickly on demand. Because supply and transmission network congestion is managed in zonal
demand of electricity must be in perfect balance at all versus nodal markets. As explained in section 3.1,
times, this variability necessitates additional mea- European markets are zonal whereas US markets are
sures for the integration of renewables into the grid.5 nodal. Nodal markets are argued to be superior to
The most commonly used measure is ramping up or zonal markets for congestion management and
down fast-acting conventional resources in response renewable balancing (Leuthold et al. 2008). Specifi-
to fluctuations in intermittent generation. Adjusting cally, zonal pricing in congestion management does
the output of conventional generators can be costly, not fully take into account the physical characteristics
though, due to various concerns, such as minimum of transmission. Moreover, zonal markets are likely to
generation constraints and cycling costs (Wu and suffer high levels of unscheduled flows due to
Kapiscinski 2013). Another option in dealing with increasing penetration of renewables (Bjørndal et al.
variable generation is using energy storage (including 2018). In contrast, nodal pricing (a.k.a. locational mar-
pumped hydro dams discussed in section 3.7). Stor- ginal pricing) arguably gives better price signals by
age can be filled when there is excess generation (such reflecting the value of scarce transmission capacity
Table 4 Renewable Integration

Unit commitment and optimal dispatch: The impact of large scale Bouffard and Galiana (2008), Wang et al. (2008), Ruiz et al. (2009),
wind integration on optimal schedule and dispatch of power Sioshansi and Short (2009), Tuohy et al. (2009), Constantinescu et al.
generation resources (2011), Papavasiliou and Oren (2013), Wu and Kapiscinski (2013), Petersen
et al. (2016), and Schulze et al. (2017)
Optimal capital investment into a renewable generation asset Murphy and Smeers (2010), Ehrenmann and Smeers (2011), Mu~noz et al.
(2011), Boomsma et al. (2012), Hu et al. (2015), Shittu et al. (2015),
Alizamir et al. (2016), Bonneuil and Boucekkine (2016), Bruno et al. (2016),
Wang et al. (2016), Welling (2016), and Aflaki and Netessine (2017)
Optimal level of generation to bid in the forward market Pritchard and Zakeri (2003), Morales et al. (2010), Dent et al. (2011), Kim
and Powell (2011), Bitar et al. (2012), and Botterud et al. (2012)
Joint operation of an intermittent power generation and electricity storage Korpaas et al. (2003), Castronuovo and Lopes (2004), Brunetta and Tina
(2007), Brown et al. (2008), Garcia-Gonzalez et al. (2008), Kim and Powell
(2011), Mauch et al. (2012), Kuznia et al. (2013), Jiang and Powell (2015a),
Billionnet et al. (2016), Moarefdoost and Snyder (2015), Qi et al. (2015),
Velik and Nicolay (2016), and Kamdem and Shittu (2017)
Effect of transmission constraints on renewable integration Sioshansi and Short (2009), Papavasiliou and Oren (2013), Fischlein et al.
(2013), and Qi et al. (2015)
Electricity markets and renewables: Market design issues that needs Cramton and Stoft (2005), Milligan and Porter (2008), Ehrenmann and
to be resolved to facilitate renewable integration; policy interventions Smeers (2011), Cramton et al. (2013), Morales et al. (2014), Franco et al.
to support renewable integration; the effect of renewable policy (2015), Jiang et al. (2016), Hach et al. (2016), Ritzenhofen et al. (2016),
interventions on electricity markets Siddiqui et al. (2016), Al-Gwaiz et al. (2017), and Pineda et al. (2018)
Optimal design of energy systems with intermittent generation (e.g. Ferrer-Marti et al. (2013), Kuznia et al. (2013), Le Cadre et al. (2015), Qu
optimal energy mix, optimal wind or solar farm placement, optimal et al. (2015), Thomaidis et al. (2016), Billionnet et al. (2016), Triado-
wind farm portfolios, optimal design of hybrid power systems and Aymerich et al. (2016), Zografidou et al. (2016), and Kamdem and Shittu
microgrids for isolated communities) (2017)
Optimizing the operations of intermittent generationassets Zhang et al. (2013), Lima et al. (2015), Steffen and Weber (2016)
Open research questions
Operational Policy
What is the impact of large scale renewable integration on What market policies or regulations can help improve the large-scale integration of
optimal schedule and dispatch of power generation renewables? How do these policies differ in nodal (e.g., U.S.) versus zonal
resources? How is that impact different in European (e.g., European) markets?
markets compared to that in US markets considering the
market coupling among interconnected power systems in
Europe?
What is the effect of transmission constraints on renewable Is the large-scale integration of renewables more efficient in a regulated or a
integration? deregulated electricity market?
How should hybrid power systems, zero-energy buildings, What should be the public incentive policies to disseminate distributed energy resources?
and microgrids that rely on distributed energy resources
be designed?
What is the optimal bidding strategy for wind and solar What are the states’ optimal incentive policies for generation capacity expansion to
power? How does the bidding strategy change if the reach renewable portfolio targets?
generating unit has dedicated electricity storage?
and nodal pricing is being considered the European Constantinescu et al. 2011, Papavasiliou and Oren
markets as well (Adamson and Parker 2013). 2013, Ruiz et al. 2009, Sioshansi and Short 2009,
Since the integration of intermittent generation Tuohy et al. 2009, Wang et al. 2008, Wu and Kapiscin-
brings new challenges to the grid operators, it is nec- ski 2013); yet, there are still research opportunities in
essary to develop unit commitment models that allow improving the existing methods, such as increasing
for high levels of intermittent generation. Unit com- computational efficiencies, improving uncertainty
mitment refers to the process of scheduling and dis- modeling, and incorporating generation and trans-
patching generation resources (for a review, see mission capacity investment decisions into the frame-
Zheng et al. 2015). Traditionally, unit commitment work. Zheng et al. (2015) provide a useful guide into
models have been deterministic optimization models, possible research directions in stochastic unit commit-
but high levels of intermittent generation will likely ment models. Adjusting the unit commitment models
necessitate a stochastic approach. There is already a to better handle the market coupling among intercon-
growing stream of research studying the impact of nected power systems in Europe is another underde-
large-scale wind integration on unit commitment and veloped area with research opportunities. Finally,
economic dispatch (e.g., Bouffard and Galiana 2008, note that this stream of research can potentially
uncover counterintuitive effects of renewable integra- schemes for renewable investment and argue that the
tion on power systems. For example, Wu and extended discussions in Norway about choosing
Kapiscinski (2013) show that despite wind power’s between a feed-in tariff and green certificates may
zero marginal cost, economic curtailment of wind can have caused a delay in renewable investments. Using
bring in significant cost savings, and contrary to the a similar real options framework as Boomsma et al.
belief, can actually reduce emissions. This finding (2012), Welling (2016) shows that uncertainty in elec-
illustrates how various interdependencies in grid tricity price and governmental support may have
operations may result in unexpected policy outcomes, counterintuitive effects on renewable capacity invest-
which emphasizes the importance of developing and ment; for example, higher uncertainty may trigger
studying rigorous models that aid policy makers in higher levels of capacity investment and a decrease of
the electric power industry. support over time can lead to higher cumulative
Capacity investments in renewable energy assets investment in the short term. Capacity investment has
face a great deal of market, technological, and policy been a central theme in OR/MS research on the elec-
uncertainty. There is a strong body of research by tric power industry. An interesting future direction
OR/MS scholars on studying these investment deci- for this line of research is examining capacity invest-
sions6 both at the firm level and at the power systems ment decisions to create zero-energy buildings and
level (e.g., Alizamir et al. 2016, Bonneuil and Boucek- microgrids that rely on distributed energy resources
kine 2016, Boomsma et al. 2012, Bruno et al. 2016, (e.g., Marnay et al. 2008, Kamdem and Shittu 2017).
Ehrenmann and Smeers 2011, Hu et al. 2015, Murphy Large scale integration of intermittent resources
and Smeers 2010, Parpas and Webster 2014, Pineda will require rethinking the design of electricity mar-
et al. 2016, Shittu et al. 2015, Siddiqui et al. 2016, kets. Even common metrics for evaluating the cost of
Wang et al. 2016, Welling 2016). For example, Hu generation technologies such as levelized cost per
et al. (2015) study an organization’s one-time invest- megawatt-hour can be problematic when dealing
ment in renewable generation such as a bank branch with the intermittency of wind and solar energy (Jos-
investing in a solar rooftop system or a hotel investing kow 2011). One of the issues with wind and solar inte-
in a solar thermal system. The renewable capacity can gration has been the difficulty to value the capacity
be coupled with a conventional technology to form a contribution of these resources due to the variability,
capacity portfolio that is used to meet the stochastic inflexibility, and uncertainty associated with their
demand for electricity. They show that performing capacity (NERC 2011). Different methods have been
capacity investment using the average efficiency of a proposed and used for this purpose without a clear
renewable technology may lead to significant overin- consensus (e.g., Jiang et al. 2016, Milligan and Porter
vestment in renewable capacity; hence data granular- 2008, NERC 2011). Failing to compensate generation
ity matters when it comes to evaluating renewable assets for their capacity contribution may hinder the
investments. Boomsma et al. (2012) use a real options necessary investments into these assets in the long
approach to study investment timing and capacity run. This problem is by no means unique to renew-
choice for renewable generation assets. Ehrenmann able generation. In fact, integration of wind and solar
and Smeers (2011) study capacity expansion in elec- power exacerbates the problem since these resources
tricity markets with wind power penetration using tend to depress electricity spot prices. This makes it
stochastic equilibrium analysis. This line of research difficult to adequately compensate both conventional
not only helps with firm-level decision making on and renewable resources. Please refer to section 3.2
capacity investments, but also can inform policy mak- for a review of these market design issues.
ers about the effects of different subsidies and market Another interesting open question regarding
structures on renewable capacity investment. For renewable integration is whether the large scale inte-
example, Hu et al. (2015) argue that providing the gration and operation of renewable generation is
same federal subsidy across different geographical more efficient in regulated or deregulated electricity
areas is inefficient, and that a lower subsidy rate is markets. On the one hand, deregulation adds more
needed for areas with high yield–demand correlation. flexibility into the system by creating markets for
Ehrenmann and Smeers (2011) show the importance ancillary services, which can better facilitate the inte-
of taking risk aversion into account when evaluating gration of intermittent renewable generation. Further,
different market policies. Specifically, they find that deregulation at the retail level enables consumers to
although energy-only and capacity-only markets (dis- choose their source of electricity, which may increase
cussed in section 3.2) behave similarly when evalu- the penetration of renewables based on consumers’
ated in a deterministic framework, risk aversion of choice. On the other hand, the presence of intermit-
investors increases the shortage of capacity in energy- tent generation makes cost recovery of power plants
only markets with a low electricity price cap. more challenging in a deregulated market, whereas in
Boomsma et al. (2012) compare different support regulated markets, this is not as problematic since the
utility can ask its public utility commission to pass 2012, Botterud et al. 2012, Dent et al. 2011, Morales
through the costs of a plant to its ratepayers. There is et al. 2010, Neame et al. 2003, Pritchard and Zakeri
need for more research to understand whether the 2003). There is also a growing stream of research in
benefits from deregulation outweigh the added chal- studying joint optimization of the operations of an
lenges when it comes to renewable integration. In par- intermittent power plant with electricity storage (e.g.,
ticular, there are opportunities for empirical research Brown et al. 2008, Brunetta and Tina 2007, Castron-
and comparative studies to provide insights on how uovo and Lopes 2004, Garcia-Gonzalez et al. 2008,
well renewable resources have been integrated under Kim and Powell 2011, Korpaas et al. 2003, Mauch
these different regimes. et al. 2012). Most of these papers either overlook sup-
The desire to move towards a cleaner energy sector ply uncertainty or account for uncertainty through
prompts policy makers to use a variety of mecha- building scenario trees and performing sensitivity
nisms to support renewable investment (e.g., renew- analysis. The study by Kim and Powell (2011) is one
able portfolio standards, tax credits, feed-in tariffs7). of the few papers that develop valid admissible poli-
These policy instruments have a significant effect on cies that take uncertainty in electricity price and wind
renewable energy deployment (Fischlein et al. 2010, generation into account. The authors study optimal
2014). A growing subset of renewable capacity invest- commitments by a wind producer that operates an
ment research specifically focuses on the effect of energy storage within a Markov Decision Process
renewable policy on market outcomes. For example, framework and derive an optimal commitment policy
Ritzenhofen et al. (2016) compare the impact of these for the special case of uniformly distributed wind
different support schemes on electricity markets by energy. Optimization of energy commitments by
developing a dynamic long-term capacity investment intermittent generation assets (with or without stor-
model. Franco et al. (2015) build a system dynamics age) is relatively an underdeveloped topic to which
simulation model to analyze the long term effects of OR/MS scholars can contribute, particularly in
the policies proposed in British electricity market improving the treatment of uncertainty in the existing
reform on electricity supply and environmental qual- methods.
ity. Alizamir et al. (2016) build a dynamic optimiza-
tion model to set and update feed-in tariffs for 3.4. Risk Management in the Electric Power
renewable energy producers in order to accelerate the Industry
deployment of renewable energy. They show that the Electric power industry has gone through a major
commonly used strategy of setting tariffs that main- transition in the last two decades with deregulation
tain the same level of profitability across years is sub- and market restructuring reshaping the industry in
optimal, and that policy makers should set either an many countries across the world. One of the most
ascending or descending profitability index depend- important consequences of the resulting move toward
ing on the strength of technological learning and dif- a competitive electricity market is the emergence of
fusion effects. Finally, Siddiqui et al. (2016) study price volatility. Because electricity has largely been
optimal target levels for renewable portfolio stan- non-storable and is subject to high demand uncer-
dards (RPS) and how those targets change under dif- tainty, the volatility in electricity price can be quite
ferent market structures. They show that when the extreme. For example, as quoted in Falbo et al. (2010),
non-renewable sector has market power, the RPS tar- while volatility in “ordinary” financial series is about
get is lower yet the social welfare is higher compared 10%–20% of average prices, this figure can reach to
to a market with perfect competition. For a more 300%–450% in some electricity prices. This extreme
detailed review on carbon policy and its implications volatility exposes market participants to significant
on the electric power industry, please refer to sec- risk. As a result, following market restructuring and
tion 3.5. deregulation, a wide range of risk management prac-
Another research question that will be of interest tices have emerged in the electric power industry
with significant levels of intermittent generation is (Eydeland and Wolyniec 2003, Sioshansi 2002).
about energy bidding by intermittent resources. Mak- Today, hedging strategies like forward and futures
ing energy commitments would be challenging for contracts are standard parts of doing business for
wind and solar producers due to the intermittent nat- market participants.
ure of their generation. The necessity to make energy While many of the risk management tools devel-
commitments would also increase the complexity of oped in financial markets can easily be applied to the
scheduling the power generation at a wind farm electricity markets, the unique characteristics of elec-
(Lima et al. 2015, Zhang et al. 2013). Optimal energy tricity requires developing some new tools and solu-
commitments in forward markets have been studied tion techniques (Deng et al. 2001). Specifically, since
in the energy literature for different types of power electricity has been and remains difficult to store, tra-
plants (e.g., Anderson and Philpott 2002, Bitar et al. ditional no-arbitrage methods of valuing commodity
derivatives have not been used directly. Another chal- instruments like futures contracts, options, and swaps
lenge is the need to value a range of cross-commodity (for a review, see Deng and Oren 2006). Vehvil€ ainen
transactions (e.g., between electricity and the fuel to and Keppo (2003) study optimal portfolio selection
generate electricity), such as spark and locational for a mix of electricity derivatives and show that with
spreads (Deng et al. 2001). These challenges led the proper modifications, some of the methods of finan-
way to a significant body of research studying elec- cial markets are applicable to electricity markets.
tricity derivatives, some of which are discussed in this Deng et al. (2001) study the valuation of electricity
section. derivatives and apply their valuation results to value
One of the most common ways to hedge against generation and transmission assets.
price risk in electricity markets is signing forward The early literature on risk management in electric-
contracts before spot market trading occurs. Signing a ity markets typically focused on electricity producers
forward contract eliminates the price uncertainty for for whom the main risk is wholesale price volatility.
both parties. There has been a lot of interest in the For retailers or load serving entities, though, there is
finance and economics literature to study electricity another layer of uncertainty that stems from load fluc-
forward prices and how they relate to the spot price tuations, usually referred to as volumetric risk or
(e.g., Bessembinder and Lemmon 2002, Bunn 2004, quantity risk. Boroumand and Zachmann (2012)
Carmona and Coulon 2014, Fleten and Lemming argue that purely contractual portfolios consisting of
2003, Longstaff and Wang 2004, Lucia and Schwartz forward and futures contracts are not efficient risk
2002). Some of the seminal papers include Bessem- management devices for hedging the volumetric risk.
binder and Lemmon (2002), who build an equilibrium Several papers in the literature address hedging the
model for electricity forward markets, and Longstaff joint price and quantity risk faced by load serving
and Wang (2004) who conduct an empirical analysis entities or retailers (e.g., Boroumand et al. 2015, Oum
of electricity forward prices and find significant risk and Oren 2009, 2010, Oum et al. 2006). There are also
premia in long-term electricity markets. papers that look at risk management for retailers
While forward contracts protect against the fluctu- through non-market mechanisms. For example, A€ıd
ating electricity price, devoting the whole production et al. (2011) study vertical integration as a risk man-
(or procurement) volume to forward contracts in gen- agement strategy and show that vertical integration
erally deemed suboptimal compared to a more inte- has a superior efficiency over forward hedging when
grated risk management approach that mixes spot retailers are highly risk averse. Downward et al.
and forward sales (or procurement). Falbo et al. (2016) also look at risk-averse retailers and study their
(2010) study this latter approach by looking at optimal contracting choices as well as entry decisions, making
spot and forward market sale combinations for an vertical integration a possible endogenous outcome.
electricity producer. Dong and Liu (2007) study for- Though much of the risk management discussion
ward contracting in the presence of a spot market for in the electric power industry focuses on hedging
a non-storable commodity using a Nash bargaining market risks like price and load uncertainty, these are
framework. Sen et al. (2006) integrate the unit com- certainly not the only risk factors affecting the indus-
mitment model with financial decision making by try. The electric power industry is shaped by numer-
incorporating forward contracts and spot market ous other sources of uncertainty such as regulatory,
transactions into the scheduling model. There has capital, and operational risks. In fact, according to a
been a growing interest in OM/Finance literature on global risk management study (Accenture 2013), the
procurement from commodity markets with several top two risk factors that are perceived to be on the rise
papers addressing optimal procurement from for- by the market participants are regulatory and policy
ward and spot markets (Devalkar et al. 2011, Goel risks. Electricity markets are still evolving with uncer-
and Gutierrez 2011, Goel and Tanrisever 2017, Inder- tainty about what regulatory framework may emerge
furth et al. 2013, Kleindorfer and Wu 2003, Pei et al. in the future. Further, a change in subsidies or tax
2011, Popescu and Seshadri 2013, Secomandi and regimes may completely shift the market towards dif-
Kekre 2014, Seifert et al. 2004, Wu and Kleindorfer ferent electricity sources (see section 3.5). These
2005). Haks€ oz and Seshadri (2007) provide a review uncertainties play an especially significant role in
of the early papers in this literature. Most of these technology and capacity investment decisions. Cer-
papers study commodities other than electricity. tain operational risks are also on the rise. Sources of
Extending this body of research to specific issues con- operational risk include terrorist attacks (conven-
cerning the electric power industry presents opportu- tional, cyber, and electromagnetic pulse attacks),
nities for OR/MS researchers. increasing number of natural disasters (partly due to
In addition to physical trading through forward global warming), solar flares and grid (generation
contracts, electricity market participants also engage and distribution) failures. The Camp Fire in California
in financial trading to hedge market risks using and the resulting bankruptcy of Pacific Gas and
Table 5 Risk Management in the Electric Power Industry

Electricity forward and futures pricing Bessembinder and Lemmon (2002), Lucia and Schwartz (2002), Fleten and Lemming
(2003), Longstaff and Wang (2004), Bunn (2004), Carmona and Coulon (2014), Islyaev
and Date (2015), and Caldana et al. (2017)
Pricing of electricity contracts and derivatives Kwon et al. (2006), Thompson (2013), Islyaev and Date (2015), and Wu and Babich (2012)
Electricity trading through forward and spot markets Sen et al. (2006), Kwon et al. (2006), Dong and Liu (2007), Falbo et al. (2010),
Oliveira et al. (2013), and Mari et al. (2017)
Risk management for load serving entities Anderson and Hu (2008), Oum et al. (2006), Hatami et al. (2009), Oum and Oren
(2009, 2010), A€ıd et al. (2011), Boroumand and Zachmann (2012), Boroumand et al.
(2015), and Downward et al. (2016)
Financial trading of electricity through electricity derivatives Deng et al. (2001), Vehvil€ainen and Keppo (2003), Kleindorfer and Li (2005), Deng and
Oren (2006), and Doege et al. (2009)
Review of electricity risk management practices Sioshansi (2002), Eydeland and Wolyniec (2003), Deng and Oren (2006), and
Liu et al. (2006)
Operational Policy
What are the best market and non-market mechanisms of How can the electric power industry develop an integrated and comprehensive risk
risk management for load serving entities? management function that encompasses not just market risks but also policy risks?
How can the electric power industry better integrate What are the impacts of regulation on financial assessment of operational risks and
financial and operational hedging for improved risk insuring against these risks?
management?
What will be the impact of improved storage technology
on financial and operational hedging?
Electric Company (PG&E)8 shows that the impact of introduces cost uncertainty. While an emissions tax
operational risks can be very severe. provides more certainty about cost of compliance, its
The ever-changing landscape of the electric power environmental impact is uncertain since there is no
industry creates the need for a more sophisticated cap on emissions. There is much discussion about
and comprehensive risk management function. The which policy is the best for reducing greenhouse gas
OR/MS research on risk management in the electric emissions (e.g., Drake et al. 2016, Goulder and Schein
power industry is relatively thin (see Table 5 for a 2013, He et al. 2012, Wittneben 2009). Ultimately the
summary of existing research and open questions). design of the policy plays a decisive role in the perfor-
There is opportunity for OR/MS scholars to do high- mance outcomes.
impact research by contributing to the development The OR/MS literature has produced a significant
of an integrated risk management function in the elec- number of papers on climate policy design and impli-
tric power industry. cations (e.g., Carmona and Hinz 2011, Caro et al.
2013, Chen and Kettunen 2017, Chen et al. 2011,
3.5. Climate Policy and Its Effect on the Electric Drake 2018, Drake et al. 2016, Is _ ßlegen et al. 2016, Is
_ ßle-
Power Industry gen and Reichelstein 2011, Jaehn and Letmathe 2010,
Increasing concerns over climate change has led to Kanudia and Loulou 1998, Nyiwul et al. 2015, Sid-
regulations of greenhouse gas emissions across many diqui et al. 2016, Subramanian et al. 2007, Sunar and
countries around the world. There are two distinct Plambeck 2016, Zhao et al. 2010). Some of these
policies aimed at emissions reduction: cap-and-trade papers uncover policy implications that are fairly
and emissions tax. Cap-and-trade is a market-based complex or counterintuitive. For example, Chen and
regulation that sets a limit (cap) on greenhouse gas Kettunen (2017) show that unlike the popular argu-
emissions and then lets firms trade the emission per- ment, uncertainty in climate policy may induce more
mits that allow a certain amount of emission. Emis- capacity investment in renewable technologies. Their
sions tax, in contrast, is not market based. It is a results provide an important input into the debate on
policy based on imposing a fee on the emission (typi- whether retaining the flexibility to update emission
cally carbon) content of fuels and is arguably easier to targets is beneficial despite its negative effect of caus-
implement. Though both policies put a price on emis- ing policy uncertainty. Similarly, Drake et al. (2016)
sions, their implications can be quite different, one of show that emissions price uncertainty under cap-and-
the main differences being the nature of uncertainty trade policy results in greater expected profit than
under the two policies. In cap-and-trade, emissions achieved under emissions tax policy with constant
prices are determined through market forces, which emissions price, which contradicts the conventional
wisdom that higher uncertainty diminishes value. increase, or remain unchanged in response to adopt-
Finally, Aflaki and Netessine (2017) show that charging a border adjustment policy. Another paper in the
ing more for emissions may inadvertently discourage OR/MS literature that considers border adjustments
investment in renewables. Many of these papers pro- is by Sunar and Plambeck (2016), who examine cli-
vide regulators better insights about firm level mate policy in the context of co-production. They
response to various forms of climate policy as well as show that depending on the co-product emission allo-
the interrelationships between different firm level cation, border adjustment can, counterintuitively,
compliance strategies. For example, Subramanian increase emissions. They also derive the socially opti-
et al. (2007) focus on the trade-offs between different mal allocation rule to allocate a supplier’s emissions
compliance strategies of a profit maximizing firm among the co-products and show that under this opti-
operating under a cap-and-trade policy. The firm can mal rule, imposing the emissions tax on the primary
invest in pollution abatement,9 procure emission per- product significantly reduces emissions and increases
mits, or adjust the production output. The paper welfare. Caro et al. (2013) also focus on supply chain
shows that, even with a simple model, the interplay emissions accounting by modeling the emission
between these strategies results in a non-trivial equi- reduction efforts of multiple firms in a supply chain
librium. Kroes et al. (2012) also analyze different and show that to induce the optimal effort levels,
levers of compliance and their effect on firm and envi- emissions need to be overallocated. These studies
ronmental performance in an empirical study. In show the importance of including firm agency in
other empirical work, Jira and Toffel (2013) analyze models, such as technology choice and production
under what conditions suppliers are more willing to decisions, as in their absence the implications of a pol-
share their emissions information with buyers in an icy may be misrepresented.
attempt to reduce emissions throughout the supply A productive area for OR/MS researchers studying
chain, Jacobs (2014) shows that voluntary emissions climate policy has been the impact of climate policy
reductions can create shareholder value, while Fabra on capacity, R&D investment, and technology choice
and Reguant (2014) show that emission costs are decisions (Aflaki and Netessine 2017, Chen and
almost completely passed through to electricity Kettunen 2017, Drake et al. 2016, Fan et al. 2010,
prices. Kettunen and Bunn 2016, Kettunen et al. 2011). Aflaki
An important area of discussion in climate policy is and Netessine (2017) look at the effect of carbon taxes
carbon leakage and border adjustment (for a review, see on renewable generation investments and show that
Condon and Ignaciuk 2013). Even though climate the effectiveness of climate policy depends on the
change policy is getting traction across the globe, the intermittency of the renewable technology. Since
stringency of requirements vary from region to renewables require backup generation, which usually
region. As a result, it has been argued that production comes from more emission-intensive technologies, an
may shift to regions with weaker regulation, which is increase in the carbon price can backfire. The study
known as carbon leakage. Carbon leakage can result in argues that reducing the effect of renewable intermit-
an increase in the total emissions and reduce the envi- tency (e.g., through storage) would increase renew-
ronmental benefits from climate policy. In addition, able capacity investment and improves the
carbon leakage can create an undue burden on effectiveness of climate policy. Drake et al. (2016)
regions with more stringent regulations as they may investigate the impact of different climate policies on
experience loss of jobs and taxable profit (Chen et al. a firm’s technology choice and capacity portfolios.
2011, Condon and Ignaciuk 2013, Is _ ßlegen et al. 2016). Several papers in this stream focus on the effect of
It is argued that leakage can be eliminated by border uncertainty in climate policy. For example, Fan et al.
adjustments, such as imposing carbon tariffs on (2010) study investment decisions under regulatory
imported goods so that they incur the same emissions uncertainty and show that a failure to consider risk
costs as incurred by goods produced locally. Drake aversion may bias policy models. Kettunen et al.
(2018) shows that carbon leakage can still arise under (2011) study how climate policy uncertainty affects
carbon tariffs but when it does, it actually decreases firm level investment decisions and market structure
emissions. This counterintuitive result emerges evolution. They incorporate real options and risk con-
because the study incorporates technology choice for straints in a multistage stochastic optimization model
the foreign producers. Under the assumption that for- and show that using this more detailed financial anal-
eign firms hold a production cost advantage, border ysis framework may create very different results from
adjustments lead to foreign producers adopting clean a conventional economic analysis. Similarly, Chen
technology at lower emission prices than domestic and Kettunen (2017) investigate the effect of uncer-
firms, which may result in “clean leakage”. The study tainty in emissions targets on firm profits, consumer
also shows that border adjustments are not inherently surplus, and cost of compliance. Interestingly, they
protectionist; domestic firm profits may decrease, find that uncertainty may induce higher capacity
investment and higher expected consumer surplus. studied the effect of climate policy on production,
Finally, Kettunen and Bunn (2016) also look at climate procurement, supply chain design, and facility loca-
policy risk but in the context of resource dependency tion decisions (Cachon 2014, Gong and Zhou 2013,
in capacity investments. They show that policy uncer- _ ßlegen et al. 2016, Krass et al. 2013, Park et al. 2015).
Is
tainty and risk aversion may result in resource depen- For example, Gong and Zhou (2013) study the optimal
dent capacity investments whereby the existing emissions trading, technology choice, and production
resources of a company impact the valuation of new plan for a manufacturing firm and characterize that
resources. Ignoring this resource dependency may the optimal emissions trading policy is a target inter-
result in inefficient design of subsidies and incentives val policy while the production policy is of base-stock
as well as underestimation of future market hetero- type. Park et al. (2015) study the effect of carbon costs
geneity. on social welfare by focusing on the last mile supply
Closely related to the previously mentioned work chain, namely retailers and consumers. They show
on capacity investment, several papers address the that when the retailer’s profitability level is low,
uncertainty surrounding climate policy in the context imposing carbon costs can significantly increase social
of energy technology R&D investments (Baker and welfare. Finally, Krass et al. (2013) study a profit max-
Shittu 2006, 2008, Baker and Solak 2011, 2014). For imizing firm’s decisions on emissions control technol-
example, Baker and Shittu (2006) analyze the optimal ogy, production quantity, and price in response to
R&D investment policy in response to an uncertain various forms of climate policy. They find that the
carbon tax. Baker and Shittu (2008) discuss the impor- firm’s reaction to an increase in emissions tax is non-
tance of incorporating both endogenous technical monotonous in the sense that while an initial increase
change and uncertainty for determining optimal tech- may prompt a switch to a greener technology; further
nology R&D policy. Finally, Baker and Solak (2011, increase may result in the opposite.
2014) develop a modeling framework for energy tech- Operations management scholars and practitioners
nology R&D portfolio management under climate can play an important role in reducing emissions
change uncertainty. An important factor that affects through revising operations and supply chain man-
not only R&D investment and technology choice, but agement practices (Plambeck 2012). Corbett and Klas-
also the trajectory of technological change in electric- sen (2006) argue that environmental excellence can be
ity markets is the (uncertain) learning rates for renew- a key to improving operational excellence and discuss
able energy or other emissions abatement the future of environmental research in operations
technologies. Cost reduction through learning-by- management. Tang and Zhou (2012) also discuss how
doing can be a significant determinant of technology OR/MS research can help firms to strike a balance
adoption and investment since it has a direct impact between profitability and sustainability. Though a sig-
on energy firms’ long-run profitability (Shittu 2014). nificant body of OR/MS research in this area has
For example, wind and solar energy have experienced already accumulated (see Table 6 for a summary of
significant cost reductions over the last decade that existing research and open questions), there is still
made them more competitive and attractive from an need for further research, particularly on studying the
investment standpoint (Lazard 2018). Learning-by- impact of policy uncertainty on firms’ compliance
doing process presents as a feedback loop where behavior and the resulting environmental outcomes.
investment into a technology invokes cost reduction
benefits from learning, which in turn triggers further 3.6. Electricity Storage
investment into the technology. However, if the learn- In the last decade, there has been a growing interest
ing rate is slow, this cascading effect may be insignifi- in energy storage, partly because of the increasing use
cant. Thus, the uncertainty in learning rates is central of intermittent energy sources like wind and solar.
to energy technology investment decisions. Several Certain electricity storage technologies are finally on
papers in the climate policy literature discuss the the verge of becoming cost competitive with their
uncertainty in learning and R&D in the context of dominant conventional alternatives and industry par-
technological change (e.g., Baker and Shittu 2008, ticipants expect costs to decrease significantly in the
Bosetti and Tavoni 2009, Gritsevskyi and Naki0 cenovi next five years (Lazard 2015).
2000, Shittu 2014). OR/MS researchers can build upon Energy storage can provide many different types of
this stream of research by endogenizing learning-by- service for ISO/RTOs, for utilities, and for end-users
doing in other contexts (such as capacity investment (Eyer and Corey 2010, Sioshansi et al. 2012). Primar-
and generation planning) and improving the stochas- ily, electricity storage helps with renewable integra-
tic modeling of uncertain innovation and technical tion, helps deferring new investment in generation,
change. transmission, and distribution capacity, provides
In addition to studies on capacity investment and backup power, energy arbitrage benefits (i.e., storing
technology choice, OR/MS researchers have also electricity when prices are low and selling it back to
Table 6 Climate Policy and Its Impact on the Electric Power Industry

Climate policy design and implementation Kanudia and Loulou (1998), Jaehn and Letmathe (2010), Zhao et al. (2010), Carmona and Hinz
_ßlegen and Reichelstein (2011), Caro et al. (2013), Nyiwul et al.
(2011), Chen et al. (2011), Is
(2015), Sunar and Plambeck (2016), Is _ßlegen et al. (2016), Siddiqui et al. (2016), Drake et al.
(2016), Chen and Kettunen (2017), and Drake (2018)
Comparison of climate policy alternatives Fan et al. (2010), Zhao et al. (2010), Chen et al. (2011), He et al. (2012), Nyiwul et al. (2015),
_ßlegen et al. (2016), and Chen and Kettunen (2017)
Drake et al. (2016), Is
Effect of climate policy on generation investment Fan et al. (2010), Kettunen et al. (2011), Drake et al. (2016), Kettunen and Bunn (2016), Chen
and technology choice and Kettunen (2017), and Aflaki and Netessine (2017)
Effect of climate policy on production, procurement, Gong and Zhou (2013), Krass et al. (2013), Cachon (2014), Park et al. (2015), _Isßlegen et al.
facility location and supply chain decisions (2016), and Yuan et al. (2018)
Firm level compliance strategies and voluntary Subramanian et al. (2007), Kroes et al. (2012), Jira and Toffel (2013), and Jacobs (2014)
emissions reduction
Carbon leakage and border adjustments _ßlegen et al. (2016), Drake (2018), and
Condon and Ignaciuk (2013), Chen et al. (2011), Is
Sunar and Plambeck (2016)
Effect of climate policy on R&D investment and Baker and Shittu (2006, 2008), Bosetti and Tavoni (2009), Baker and Solak (2011, 2014),
technology portfolios and Shittu (2014)
Operational Policy
How can operations and supply chain management Can climate policies be improved by bringing in an operations management perspective,
practices be revised to reduce emissions? How can such as incorporating firm level capacity, production, and emission abatement decisions
OR/MS research help firms strike a balance between into policy models?
sustainability and profitability?
How does uncertainty in climate policy affect capacity How should uncertainty in technological learning rates be factored in when designing
investment, technology choice, and production decisions? climate policy?
How should uncertainty in technological learning rates be How should policy address “carbon leakage” challenges?
factored in generation planning models?
grid when prices are high), and ancillary services. that OR/MS scholars are particularly well-equipped
Despite these potential benefits, there has not been to tackle these modeling and analysis challenges (see
much use of large-scale electricity storage in practice Table 7 for a sample of existing research and Castillo
(with the exception of pumped hydro). Sioshansi and Gayme (2014) and Weitzel and Glock (2018) for
et al. (2012) provide a comprehensive account of the more detailed literature reviews).
regulatory, market, and technological barriers in front In order to accurately value energy storage, one
of the wide-spread adoption of electricity storage. needs to optimize its operation based on the particu-
One barrier is the inability to accurately estimate the lar type of service(s) under study. Optimizing the
value of storage, partly because markets are not com- operation of energy storage (such as finding the opti-
plete in terms of pricing some ancillary services and mal policy for charging and discharging a battery) is a
partly because most valuation analyses consider only promising area of research for OR/MS scholars (e.g.,
one or two closely-related storage applications Brown et al. 2008, Granado et al. 2007, Harsha and
instead of maximizing storage value across multiple Dahleh 2015, Jiang and Powell 2015a, Paine et al.
value streams. Indeed, while there is a growing body 2014, van de Ven et al. 2013, Xi et al. 2014, Zhou et al.
of research that evaluates the arbitrage benefits of 2015). This type of problem has similarities with clas-
storage (e.g., Figueiredo et al. 2006, Graves et al. 1999, sical inventory management problems, yet with dis-
Sioshansi et al. 2009, 2012, Walawalkar et al. 2007), tinct challenges primarily due to conversion losses in
and the use of storage in renewable integration (e.g., charging and discharging, dissipation losses, and
Kim and Powell 2011, Harsha and Dahleh 2015, Qi ramp constraints. Many studies in this stream of
et al. 2015, Sioshansi 2011b), there are few studies that research do not properly incorporate the stochastic
incorporate more than one use of storage (e.g., Drury nature of this problem (e.g., Brown et al. 2008, Gran-
et al. 2011, Walawalkar et al. 2007, Xi et al. 2014). ado et al. 2007), which provides opportunities for
Analyzing multiple uses requires simultaneous opti- OR/MS researchers. Harsha and Dahleh (2015) ana-
mization of services that may compete with or com- lyze the optimal management and sizing of energy
plement one another, which makes the problem storage in the presence of intermittent generation
analytically challenging. In addition, one needs to using a Markov Decision Process. They consider
account for market uncertainty in these valuations, renewable generators that directly face demand (such
which further complicates the analysis. We believe as those in game parks and industrial complexes)
Table 7 Electricity Storage
Sample literature

Arbitrage value of storage Graves et al. (1999), Walawalkar et al. (2007), Figueiredo et al. (2006), and Sioshansi et al.
(2009, 2011)
Optimal operating (e.g., charging, discharging, Brown et al. (2008), Harsha and Dahleh (2015), L€ohndorf et al. (2013), van de Ven et al.
bidding) policy for the storage (2013), Zhou et al. (2015), Granado et al. (2007), Xi et al. (2014), Paine et al. (2014),
Jiang and Powell (2015a,b), and Moarefdoost and Snyder (2015)
Optimal storage capacity Harsha and Dahleh (2015), Brown et al. (2008), Brunetta and Tina (2007), Ru et al. (2013),
Babrowski et al. (2015), Jiang et al. (2016), Billionnet et al. (2016), and Qi et al. (2015)
Effects of integrating electricity storage on social welfare Sioshansi (2010, 2011b), Schill and Kempert (2011), and Sioshansi (2014)
Effects of integrating electricity storage on emissions Sioshansi (2011a), Greenblatt et al. (2007), and Denholm et al. (2005)
Value of storage based on multiple types of Walawalkar et al. (2007), Drury et al. (2011), and Xi et al. (2014)
service that the storage can provide
Operational Policy
How can multiple uses of electricity storage that may be How should the electricity markets be redesigned to enable widespread integration of
complements or substitutes be incorporated into storage electricity storage?
valuation models?
How can multiple uses of electricity storage that may be Is energy storage integration more efficient in a regulated utility or deregulated
complements or substitutes be incorporated when optimizing electricity market?
storage operations?
What are the optimal infrastructure combinations of electricity How will commodity market regulations adapt to changes in storage capabilities?
storage with traditional (hydro) and intermittent (solar and
wind) power generation methods?
where energy storage is used to reduce the cost of sizing of electricity storage systems within a frame-
electricity consumed. They derive a dual-threshold work of transmission network planning. They show
type of optimal storage management policy. Billion- that even a small size electricity storage system may
net et al. (2016) use robust optimization to study opti- significantly reduce the necessary transmission
mal sizing of a standalone energy system with investment for renewable integration. In a firm level
batteries and intermittent generation. Xi et al. (2014) study, Kim and Powell (2011) focus on renewable
develop a stochastic dynamic program to co-optimize energy commitments in forward markets that have
multiple uses of a distributed energy storage (e.g., a associated penalties if the contracts are breached. In
battery that has been installed in a home). Jiang and this setting, storage is an insurance that minimizes the
Powell (2015a) develop an approximate dynamic pro- risk of making advance commitments in the market.
gramming algorithm that can be applied to study the On a more strategic level, Anderson and Parker
joint operation of intermittent generation and electric- (2013a) study co-specialization investment decisions
ity storage. Zhou et al. (2015) study a merchant using of an emergent storage technology to better comple-
storage to manage electricity surpluses in an electric- ment the operations of a renewable technology. In
ity wholesale market and show how negative prices their setting, storage smooths the volatility of power
affect the optimal storage policy structure. Paine et al. delivered by the renewable technology it comple-
(2014) develop a dynamic programming model of ments.
pumped hydroelectric storage operation under differ- For OR/MS scholars, there are many potential ave-
ent market rules and show how market rules affect nues of future research regarding electricity storage
operational strategies as well as the profitability of the (see Table 7 for a summary of open questions). As
pumped hydro facility (We provide a more detailed mentioned above, one of the most fundamental
review on hydropower operations in section 3.7). unsolved problems is the valuation of storage based
Finally, Jiang and Powell (2015b) study optimal bid- on multiple types of services. A consistent methodol-
ding in the electricity markets by grid-level electricity ogy capable of comparing the net value of multiple
storage. services provided by electricity storage to other
In addition to developing operational policies for incumbent technologies would have a significant
electricity storage, OR/MS scholars have also focused impact on the adoption of these technologies. On the
on the use of storage for renewable integration. For policy side, there are regulatory changes that must be
example, Qi et al. (2015) adopt the perspective of a adapted to enable widespread integration of energy
central planner and study the optimal location and storage (Sioshansi et al. 2012). Testing the effect of
different market designs and regulations on the inte- Wind-hydro coordination problem is not just a techni-
gration of energy storage is another promising area cal matter that needs to be resolved within the
for future research. For example, it is unclear whether domain of utilities. Since hydro units have many dif-
integration of storage is more efficient in a regulated ferent functions (power generation, irrigation, recre-
or a deregulated market. Currently, it is hard for ation, etc.), there are typically numerous stakeholders
energy storage to compete in energy markets where involved with different market and economic consid-
the rules do not adequately value the flexibility that erations. The interactions between the many functions
storage can provide, whereas it may be easier for a of hydro and the involvement of these different stake-
regulated utility to make the economic case for energy holders will ultimately shape the prospects of wind
storage. However, as the platformization of the grid and hydro integration. Thus, in addition to opera-
progresses in deregulated markets, the situation may tional-level studies addressing technical aspects of the
easily reverse. On a final note, studies looking at the coordination, there is need for more macro-level stud-
effects of storage deployment on emissions (e.g., Den- ies, such as those based on dynamic simulation meth-
holm et al. 2005, Greenblatt et al. 2007, Sioshansi ods, to understand the future role of hydro in this
2011a) or on social welfare (e.g., Schill and Kempert context.
2011, Sioshansi 2010, 2011b, 2014) are mostly based on Though hydropower’s potential benefits for wind
energy arbitrage use of storage. As markets evolve to integration has increased its value in the eyes of the
accommodate multiple uses of storage, new studies utilities, its overall popularity may very well decline
will be needed to reassess the impact of storage in the near future due to reduced availability of good
deployment on emissions and social welfare. spots for dam construction, concerns about the envi-
ronmental impact of building new dams on river
3.7. Hydropower Operations ecosystems, and more recently, concerns about the
Hydropower is one of the oldest methods of produc- effects of climate change. A changing climate implies
ing power. It is low cost, low emissions, and flexible. changes in evaporation rates, precipitation patterns,
All of these factors made hydropower the most glacial melt rate, and the frequency of extreme meteo-
widely used renewable source of energy around the rological events. All of these factors decrease water
world, accounting for over 16% of the world’s net resources and hydropower potential in some regions
electricity production.10 Pumped storage hydropower while increasing them in others. Some negative effects
is also the dominant form of energy storage on the have already been observed in various locations. For
grid (see section 3.6 for a discussion of energy stor- example, on the Colorado River, an increased rate of
age). evaporation has resulted in reservoirs that are less
Hydropower is often seen as the perfect comple- than half full (Lustgarten 2016), in California a
ment to wind power, as it can quickly ramp up and draught-induced shift from hydropower to natural
down and therefore can balance the fluctuations in gas increased ratepayers’ spending by an estimated
wind output. With the growing percentage of wind $1.4 billion between 2011 and 2014 (Gleick 2016), and
energy in the power system, this complementarity in Brazil draughts caused rolling blackouts nation-
has received a lot of attention. Many countries are wide (Holthaus 2015). Though the changing climate is
investigating the opportunity to integrate wind and also expected to benefit hydropower in some regions
hydropower systems in order to optimize their output (Acker 2013), the fundamental problem remains:
through coordinated operation (Acker 2011). How- Hydropower operations will face more uncertainty in
ever, coordinated operation of wind and hydro the future and are going to become more challenging
resources is not a trivial problem due to many non- as a result of climate change. OR/MS literature
power constraints on hydro units. For example, hydro already offers a strong body of research on hydro-
units may be required or prevented from operating at power optimization (see Table 8 for references and
certain times to avoid flooding, to provide irrigation open research questions). Nonetheless, there is a need
water, to maintain reservoir levels for recreation and for revising these models and methods to better take
for other ecosystem considerations such as fish pas- into account the effect of climate change and the
sage. All of these considerations make up a challeng- uncertainty that it brings.
ing optimization problem, which provides important With the changes in climate, the value of hydro
research opportunities for OR/MS scholars. There is becomes more uncertain as well, increasing the riski-
already a burgeoning stream of research on wind and ness of hydropower capital investments. This is espe-
hydro integration (Belanger and Gagnon 2002, Ben- cially true for larger dams. There is some work in the
itez et al. 2008, Bueno and Carta 2006, Castronuovo OR/MS literature that focuses on capital investments
and Lopes 2004, Jaramillo et al. 2004), yet with limited in hydroelectricity, typically using a real options
presence in OR/MS journals (e.g., L€ ohndorf et al. framework (e.g., Bøckman et al. 2008, Bruno et al.
2013, Steffen and Weber 2016, Vespucci et al. 2012). 2016, Thompson et al. 2004); yet, more work is needed
Table 8 Hydropower Operations
Sample literature

Optimal operation of Edirisinghe et al. (2000), Escudero (2000), Nowak and R€omisch (2000), Philpott et al. (2000), Cai et al. (2001),
hydropower plants Pritchard and Zakeri (2003), Lino et al. (2003), Castro and Gonzalez (2004), Garcıa-Gonzalez et al. (2007), Latorre
et al. (2007), Fleten and Kristoffersen (2008), Stamford Da Silva and Campello De Souza (2008), Azevedo et al.
(2009), De Ladurantaye et al. (2009), Frangioni and Gentile (2009), Cerisola et al. (2012), Guigues and Sagastizabal
(2012), Denault et al. (2013), Densing (2013), Pritchard (2015), Ghaddar et al. (2015), Vojvodic et al. (2016), Seguin
et al. (2017), Zephyr et al. (2017), Carpentier et al. (2018), and Gauvin et al. (2018)
Wind and hydro coordination Belanger and Gagnon (2002), Castronuovo and Lopes (2004), Jaramillo et al. (2004), Bueno and Carta (2006), Benitez
et al. (2008), Vespucci et al. (2012), L€ohndorf et al. (2013), and Steffen and Weber (2016)
Investment in Chaton and Doucet (2003), Thompson et al. (2004), Bøckman et al. (2008), and Bruno et al. (2016)
hydropower assets
Operational Policy
How should wind and hydropower operations be coordinated? Given hydropower’s new role of balancing the fluctuations in wind output, should
How does hydropower’s new role of balancing the fluctuations in new incentives be designed to promote investments into hydropower?
wind output interact with its other functions such as irrigation?
How does the uncertainty introduced by climate change affect Given the environmental consequences of building new dams, how should policy
hydropower operations? makers reconcile the needs of various stakeholders in designing hydropower
incentives and regulations?
How does the uncertainty introduced by climate change affect
hydropower capacity investments?
How does the uncertainty introduced by climate change influence
the effectiveness of hydropower in achieving climate targets? For
example, given the increased risk of prolonged draughts in some
regions due to climate change and that the resulting gap in
generation tends to be picked up by fossil-fuel-based generators,
what is the net effect of hydropower capacity expansions on
achieving climate targets?
to fully understand the effect of climate change on the Sullivan 2008), although their net effect on other pol-
desirability of these investments. Despite the potential lutants such as SO2 and NOX depends on the electric-
concerns, many countries are still interested in ity generation mix and the charging pattern
expanding their hydropower resources in order to (Sioshansi 2012, Sioshansi et al. 2010). More impor-
quickly meet low-carbon energy generation targets tantly, grid-connected transportation solutions like
(Holthaus 2015); but a higher reliance on hydro may plug-in electric vehicles will grow cleaner over time
actually increase carbon emissions in prolonged as they will benefit from any future reductions in gen-
draughts as the gap in generation is likely to be eration emissions in the electric power industry.
picked up by potentially inefficient fossil fuel-based Plug-in electric or hybrid vehicles (PEVs) have a
generators. Thus, calculating the effect of hydropower battery that can be recharged from the grid with a
capacity expansions on achieving climate targets is plug-in charger. Thus, wide-spread adoption of these
not straightforward and remains an open research vehicles could represent a significant potential shift in
question. the use of electricity and the operation of electric
power systems. In particular, the need for additional
3.8. Electrification of the Transportation Sector generation, transmission, and distribution capacity
With increasing concerns about emissions, alternative can increase, especially if vehicles are charged during
fuel vehicles such as electric and hybrid electric vehi- periods of peak demand (Parks et al. 2007). There are
cles have significant government support since these many studies that examine the impacts of integrating
vehicles can use cleaner sources of fuel compared to PEVs into the power system (e.g., Lemoine et al. 2008,
conventional gasoline or diesel. Several studies have Parks et al. 2007, Sioshansi 2012, Sioshansi and Den-
confirmed that plug-in hybrid electric vehicles emit holm 2009, Sioshansi and Denholm 2010, Sioshansi
less CO2 over their entire fuel cycle than conventional et al. 2010, Stephan and Sullivan 2008, Wang et al.
vehicles (Parks et al. 2007, Peterson et al. 2011, Sama- 2010). Richardson (2013) provides a review of early
ras and Meisterling 2008, Sioshansi 2012, Sioshansi work in this area. A key result from these studies is
and Denholm 2009, Sioshansi et al. 2010, Stephan and that the net effect of PEVs on power system costs and
emissions largely depends on the charging pattern of within their focus on the German secondary reserve
the PEVs and the electricity generation mix. For exam- market, the overall profitability of the aggregator con-
ple, if PEVs are charged during peak demand hours, cept is rather low. Strategies to improve the business
they tend to use costly, less efficient, and dirtier gen- models for aggregators are an interesting area for fur-
erators than if charging is delayed to off-peak hours. ther research.
Several studies (e.g., Samaras and Meisterling 2008, Despite governmental subsidies that support their
Sioshansi and Denholm 2009, Stephan and Sullivan adoption in several countries, electric vehicles (plug-
2008) have demonstrated that if PEVs are charged in or otherwise) have not achieved mass adoption yet,
during the night using excess generating capacity, largely due to three limitations. The first one is the
they will have a minimal impact on the power grid in high upfront costs of these vehicles. Electric vehicles
terms of capacity requirements. Thus, it will be are costlier than conventional vehicles, mainly
important to incentivize desirable charging patterns because of the expensive battery they contain. Even
through a market-based approach by providing dif- though the fuel costs are lower for these vehicles, the
ferent tariffs, such as real-time pricing and time-of- price difference is high enough to become a deterrent.
use rates. Several studies study the cost and emissions The second reason behind lack of adoption is “range
impact of PEVs under these different schemes (e.g., anxiety.” Electric vehicles have a shorter range com-
Sioshansi 2012, Wang et al. 2010). As PEVs become pared to conventional ones before the need for refuel-
more wide-spread, designing market mechanisms or ing arises. Furthermore, it takes a couple of minutes
regulations to invoke desirable charging patters will to refuel conventional vehicles, while the battery of an
become an important area of research. electric vehicle can take several hours to recharge
Another key aspect that shapes the effect of PEVs (Level 2 chargers), although level 3 charges such as
on the power system is the opportunity for vehicle-to- the Tesla supercharger (135KW) can provide an 80%
grid (V2G) services. With the technological advance- charge in 30 minutes (Srdic and Lukic 2019). Hybrid
ments reshaping the grid, PEVs will potentially be and plug-in hybrid vehicles remedy this issue of
able to provide many services to the grid including range anxiety, as the vehicle can switch to gasoline
capacity and ancillary services. For example, PEV bat- once the battery is depleted. Finally, the third limita-
teries are essentially electricity storage devices, which tion is the lack of a recharging infrastructure, which
can be charged when the cost of generating electricity presents itself as a chicken-and-egg problem: Drivers
is low and discharged to the grid when it is high are reluctant to purchase electric vehicles until the
(Peterson et al. 2010). This capability improves the recharging infrastructure is wide-spread enough,
efficiency of the electric system by decreasing the whereas service providers are hesitant to invest heav-
peak demand, which reduces the usage of high cost, ily on infrastructure unless there is significant
high emissions peaking generators. Further, with demand. In the United States, Tesla is the first com-
V2G capability, PEVs can provide other ancillary ser- pany to substantially invest in a rapid (level 3)
vices such as regulation and spinning reserve. Using recharging network and, in order to capture the bene-
PEVs for these services would allow the system to fit of the investment, the system is available only for
operate more efficiently, decreasing the emissions Tesla vehicles (Nicholas and Hall 2018). This chicken-
from generation units that are currently used to pro- and-egg problem presents interesting policy ques-
vide such services (Kempton and Tomic 2005, tions that can be analyzed through mathematical
Sioshansi and Denholm 2010). The potential impact of modeling: Should governments subsidize consumers
V2G services on the electric power industry is a newly to promote early adoption of electric vehicles (as
developing area that presents interesting research many do), or the private sector to encourage invest-
opportunities. In one of the few OR/MS papers on ment in recharging infrastructure? How does the
this topic, Broneske and Wozabal (2017) study con- volatility in fossil fuel prices affect the adoption
tracts between PEV owners and entities called aggre- behavior and hence the effectiveness of any of these
gators, who generate revenue by combining a large subsidies? OR/MS scholars can contribute to this lit-
number of individual PEVs to provide ancillary ser- erature by building sophisticated mathematical mod-
vices in the electricity markets. Specifically, they build els of adoption dynamics for electric vehicles. See
a model that encompasses decisions of a profit-maxi- Table 9 for references to the existing research and a
mizing aggregator on PEV pool composition, bidding summary of open questions.
on reserve markets, and dispatching of PEVs for the There is already a growing stream of OR/MS
provision of reserve power. Among other things, they research studying mass adoption of alternative fuel
study how contract parameters such as plug-in dura- vehicles. Struben and Sterman (2008) build a dynamic
tion and guaranteed driving range affect the aggrega- simulation model of the diffusion of alternative-fuel
tor’s profitability and show that these effects are vehicles by incorporating key feedback structures
sometimes counterintuitive. They also show that, such as R&D, learning by doing, technological
Table 9 Plug-in Electric and Hybrid Vehicles

Impact of integrating PEVs into the power system Parks et al. (2007), Lemoine et al. (2008), Samaras and Meisterling (2008), Stephan and
Sullivan (2008), Sioshansi and Denholm (2009), Sioshansi et al. (2010), Wang et al. (2010),
Sioshansi (2012), and Kahlen et al. (2018)
Market diffusion of electric vehicles: Barriers in front of Struben and Sterman (2008), Luo et al. (2014), Cohen et al. (2015), Lim et al. (2015), Gnann
the mass adoption and Plotz (2015), He et al. (2017), Kuppusamy et al. (2017), and Shao et al. (2017)
Optimal deployment and operation of refueling Capar et al. (2015), Lim and Kuby (2010), Raviv (2012), He et al. (2013), Mak et al. (2013),
infrastructure Nurre et al. (2014), Avci et al. (2015), Chung and Kwon (2015), Hung and Michailidis (2015),
Yang and Sun (2015), Zhao and Ma (2016), and Yildiz et al. (2016)
Vehicle routing and scheduling problem for electric Boyaci et al. (2015), Goeke and Scheider (2015), Hung and Michailidis (2015), Doppstadt et al.
(and other alternative fuel) vehicles with limited (2016), Hiermann et al. (2016), Pimenta et al. (2016), Wen et al. (2016), and Schiffer and
ranges Walther (2017)
Operational Policy
How do different types of refueling infrastructure What kind of policies would help the adoption of PEVs the most? Should governments
compare in terms of their effectiveness of promoting subsidize consumers to promote early adoption of electric vehicles, or the private sector to
the adoption of plug-in electric or hybrid vehicles encourage investment in refueling infrastructure, or a mix of the two?
(PEVs)?
What would be the best way to incorporate demand What are some policies and market designs that would incentivize desirable charging patterns
uncertainty in PEV adoption and refueling for PEVs to reduce their impact on the grid in terms of capacity requirements?
infrastructure models?
What would be the effect of wide-spread availability of What kind of market rules and policies would facilitate the integration of V2G services? How
V2G services on power grid performance? would those policies differ in a regulated utility versus deregulated market?
What would be the potential capacity and infrastructure How does the volatility in fossil fuel prices affect the adoption of electric vehicles and the
requirements for V2G integration? effectiveness of policies that support adoption, such as government subsidies?
How would revenue streams from V2G affect consumer Should recharge network operators be required to open access to their networks?
adoption of PEVs and vice versa?
spillovers, and the development of refueling infras- the electric vehicle manufacturer sets the price and
tructure. Lim et al. (2015) study the impact of range capacity investment while the policy maker sets the
anxiety and resale anxiety on the mass adoption of consumer subsidy levels. They show that policy mak-
electric vehicles using a stylized durable goods ers can significantly miss their desired adoption tar-
model. They compare different business models (such gets if they ignore demand uncertainty. This finding
as battery owning versus leasing) in terms of electric confirms that there is indeed a need for models that
vehicle adoption, emissions, consumer surplus and incorporate uncertainty into the decision-making pro-
firm profitability; and determine which model works cess. This is an area where OR/MS scholars can con-
the best depending on the degree of resale anxiety. tribute to with their expertise in building and
Gnann and Plotz (2015) and Gnann et al. (2018) pro- analyzing stochastic models.
vide reviews of models for market diffusion of alter- Another potential area of research for OR/MS
native fuel vehicles and their refueling infrastructure. scholars is the design and operation of the refueling
He et al. (2017) study PEV sharing platforms as an infrastructure for electric and plug-in electric vehicles.
alternative to ownership, which potentially can rem- One solution proposed as an efficient refueling infras-
edy some of the aforementioned hurdles in front of tructure is battery switching (also known as battery
PEV adoption. One important component that tends swapping) stations. In these stations, the drivers
to be missing in this stream of research is the incorpo- would be able to quickly exchange a depleted battery
ration of uncertainty into the modeling process. Many for a fully charged one, which would solve the issue
papers study the effect of demand or technological of range anxiety as long as there is a dense network of
uncertainty through sensitivity analysis rather than these stations. Further, under such a system, the dri-
building a stochastic model. One exception is He et al. vers would effectively lease the costly battery rather
(2017) who use distributionally robust optimization to than owning it and would pay for usage based on
address the uncertainty in customer adoption of PEV miles driven. There are significant operational chal-
sharing. Another notable exception is Cohen et al. lenges in designing and running the network of bat-
(2015) who study the effect of demand uncertainty on tery switching stations. In terms of infrastructure
optimal consumer subsidies for electric vehicles (and design, the main challenge is uncertainty about adop-
other green technologies). The authors analyze a vari- tion rates, which not only deters investment but also
ation of the price-setting newsvendor model where makes it difficult to plan for the spare battery
requirements in these stations. Avci et al. (2015) build promoting the adoption of PEVs and studying the
a model of switching-station-based electric vehicle effect of different market and policy scenarios on their
system and compare it to conventional electric vehi- success.
cles in terms of consumer adoption and environmen-
tal impacts. From an operations management point of 3.9. Natural Gas Industry and Its Impact on
view, they find the optimal inventory level for spare Electric Power Generation
batteries and the optimal price to charge per mile dri- The OR/MS field has a long history of research in the
ven. From a policy point of view, they show that poli- context of natural gas industry. Table 10 summarizes
cies that are more effective in reducing oil some of the major research topics in this area that
dependence (e.g., electric vehicle subsidies) tend to be have been actively pursued by OR/MS scholars. Nat-
less effective in reducing emissions. The reason is that ural gas plays an increasingly important role in power
such policies not only increase adoption but also lead generation. In our review, we highlight research areas
to more driving of electric vehicles; and in most coun- that have become more relevant in light of this
tries electricity generation is still obtained using car- increased dependence between the natural gas and
bon emitting technologies. Mak et al. (2013) study the electric power industries noting that the overall
planning process for deploying battery switching opportunities of research regarding natural gas indus-
infrastructure using distributionally robust optimiza- try are not limited to what is covered in this section.
tion. They build two models with different objectives The recent increase in the supply of natural gas
and study the potential impacts of technology because of higher production from unconventional
advancements and the standardization of the battery resources has significantly reduced natural gas prices
technology on optimal deployment strategy. Their in the United States, and thus, increased the appeal of
paper is one of the few in this literature that takes natural gas-based electricity generation. Further, with
uncertainty into account. increased penetration of intermittent renewable gen-
Other types of refueling infrastructure alternatives eration, the responsiveness of gas-fired plants has
such as public charging stations have also been stud- become a critical asset in balancing out the variability
ied in the literature. He et al. (2013) study the optimal in wind and solar power. Indeed, currently, more
allocation of public charging stations for plug-in elec- than 30% of electricity generation in the United States
tric vehicles by a central planner with the goal of max- uses natural gas as fuel (EIA 2016), which has made
imizing social welfare. Their game-theoretical model the electric power industry the second largest con-
investigates the interactions between electricity price, sumer of natural gas.11 This shift has profound impli-
availability of charging stations, and the destination cations for both the electric power and the natural gas
choices for these vehicles and calculates traffic and industry. One of the pressing issues is the inadequacy
power flow distributions. Many other papers discuss of transport networks for natural gas. In the United
the optimal locations for refueling stations using vari- States, the transport capacity (e.g., pipeline capacity)
ous methods such as flow-refueling location models for natural gas has not kept up with the increase in
(e.g., Capar et al. 2015, Chung and Kwon 2015, Lim supply and demand. For example, the Algonquin Gas
and Kuby 2010, Yildiz et al. 2016) and agent-based Transmission pipeline that traverses New England,
simulations Zhao and Ma (2016). Other work on PEV New York, and New Jersey has run at 100% capacity
refueling infrastructure include Nurre et al. (2014), for more than four years due to increased reliance on
who study the optimal operations of battery switch- natural gas for electricity in that region (Patel 2016).
ing stations with a model that considers V2G capabili- In areas that heavily rely on natural gas for electricity,
ties, Hung and Michailidis (2015), who use a queuing this inadequacy of pipeline capacity can quickly
model to study the optimal routing of vehicles that become problematic since generators can be left with
request charging to stations with available charging no means to receive gas on days when there is high
resources, and other similar papers that adapt the demand. Further, scarcity of transport capacity may
vehicle routing problem to incorporate the new chal- contribute to price surges and volatility for natural
lenges introduced by PEVs (e.g., Doppstadt et al. gas. For example, in late January and early February
2016, Goeke and Scheider 2015, Hiermann et al. 2016). 2013, spot prices at the Algonquin and New York
There is still a great deal of uncertainty about the kind gates were nearly an order of magnitude higher than
of refueling infrastructure that will take-off once alter- the Henry Hub reference prices.12 Such high natural
native fuel vehicles become more wide-spread, and gas price volatility is challenging for utilities to man-
despite the initial excitement they generated, battery age; thus, greater coordination between electric power
switching stations may never become the dominant and natural gas industries is needed to mitigate the
model. One potential area of research for OR/MS effects.
scholars is comparing different types of refueling The growing interdependence between electric
infrastructure in terms of their effectiveness of power and natural gas industries, especially in the
Table 10 Natural Gas Industry

Coordinated operation of the electric Li et al. (2008), Liu et al. (2009), Hibbard and Schatzki (2012), Alabdulwahab et al. (2015), Bai et al.
power and natural gas industries (2016), Cui et al. (2016), and Chiang and Zavala (2016)
Coordinated expansion planning of the Chaudry et al. (2008), Unsihuay-Vila et al. (2010), Chaudry et al. (2014), and Zhang et al. (2015)
electric power and natural gas industries
Natural gas and LNG storage Butler and Dyer (1999), Gray and Khandelwal (2004), Carmona and Ludkovski (2010), Chen and
optimization and valuation Forsyth (2007), Boogert and De Jong (2008), Thompson et al. (2009), Secomandi (2010a, 2010b),
Lai et al. (2010, 2011), Felix and Weber (2012), Wu et al. (2012), Secomandi et al. (2015), and
Nadarajah et al. (2015)
Optimal procurement and/or inventory Guldmann and Wang (1999), Jaillet et al. (2004), Mendelson and Tunca (2007), Muthuraman et al.
policy for natural gas and other commodities (2008), Aouam et al. (2010), Wu and Chen (2010), Devalkar et al. (2011), Goel and Gutierrez (2011),
Chen et al. (2013), Kouvelis et al. (2013), Secomandi and Kekre (2014), Chen et al. (2015), and
Aouam et al. (2016)
Equilibrium models of natural gas markets Gabriel et al. (2001), Gailly et al. (2001), Gabriel et al. (2005a,b), Chung et al. (2006), Egging and
(looking at price formation, market power, Gabriel (2006), Wu and Chen (2010), Egging (2013), Huppmann (2013), Baltensperger et al. (2016),
capacity adequacy, etc.) Devine et al. (2016), and Lee (2016)
Capital investments in oil and gas projects Smith and Nau (1995), Smith and McCardle (1998), Clyman et al. (1999), Smith and McCardle (1999),
and their valuation Kenyon and Tompaidis (2001), Brand~ao et al. (2005), Hahn and Dyer (2008), Wang and Dyer (2012),
and G€ulpınar et al. (2014)
Pipeline design Brimberg et al. (2003), Andre et al. (2009), and Brimberg et al. (2007)
Valuation of pipeline capacity Secomandi (2010b) and Secomandi and Wang (2012)
Pipeline capacity expansions Andre et al. (2009), Garcia and Shen (2010), and Egging (2013)
Natural gas pipeline maintenance and Brito et al. (2010) and Angalakudati et al. (2014)
repair management
Optimal management of natural gas Guldmann and Wang (1999), De Wolf and Smeers (2000), Rıos-Mercado (2003), Dempe et al. (2005),
distribution through pipelines Kalashnikov et al. (2010), Dempe et al. (2011), Schreider et al. (2014), Fodstad et al. (2016), and
Hiller et al. (2018), Kirschstein (2018)
Operational Policy
How can natural gas pipeline capacity be better managed How should the contracts and market rules be redesigned to better facilitate the
to serve the increasing demand from the electric power industry? transactions between pipeline companies and gas-fired power plants?
How should the flexibility in natural gas supply networks Do existing markets provide sufficient price signals for necessary infrastructure
be valued? development of pipelines and storage?
How should the increasing natural gas demand from the How should the coordination between electricity and gas markets be improved
power sector be incorporated into expansion planning of (e.g., by aligning the market clearing times, coordinating scheduling mechanisms,
natural gas transportation networks and storage assets? etc.) to reduce the degree of financial risks experienced by gas-fired generators?
How should the increasing volatility of demand be taken
into account when managing natural gas storage operations?
How should LNG storage be managed and valued?
United States, has drawn a lot of attention from systems can result in significant improvements in eco-
energy industry practitioners and scholars. Hibbard nomic performance and flexibility. Alabdulwahab
and Schatzki (2012) discuss the many challenges asso- et al. (2015) look at the coordination of electricity and
ciated with the growing interdependence and provide natural gas infrastructures for the purpose of firming
a framework for electric–gas coordination. The facts the variability of wind energy using a stochastic unit
that electricity market must be balanced in real time commitment model. Bai et al. (2016) also take into
and that the two markets are not designed to clear account wind uncertainty and use an interval opti-
simultaneously make coordination between the two mization-based model to optimally coordinate the
markets particularly challenging. Academic research operations of the integrated natural gas and electricity
that studies electric–gas coordination is growing, systems. Another stream in the literature focuses on
albeit with limited contribution from OR/MS jour- coordinated expansion planning of electricity and nat-
nals. Many of the papers in this literature focus on ural gas infrastructures (Chaudry et al. 2008, 2014,
optimizing the coordinated operation of electricity Unsihuay-Vila et al. 2010, Zhang et al. 2015). Overall,
and natural gas networks (e.g., Alabdulwahab et al. the literature on the coordination of natural gas and
2015, Bai et al. 2016, Chiang and Zavala 2016, Cui electric power industries is relatively small, present-
et al. 2016, Li et al. 2008, Liu et al. 2009). For example, ing many opportunities for further research.
Chiang and Zavala (2016) show that coordinated dis- Another consequence of the shift to natural gas-
patch of natural gas and electricity transmission based generation is the significant changes in the
demand pattern for natural gas. Specifically, the vari- underlying contract. Possible extensions to this
ability and uncertainty in intermittent generation is stream of research include incorporating market
likely to increase the variability and uncertainty in power or transaction costs into the analysis, and
natural gas demand. The overall cyclicality of electric- adapting the existing framework for transactions with
ity demand is also bound to reshape the demand gas-fired power plants.
curve for natural gas. All this variability requires flex- Another stream of research related to managing
ibility in natural gas supply networks, as well as bet- pipeline capacity deals with capacity expansion invest-
ter management of pipelines and storage. This opens ments (e.g., Andre et al. 2009, Egging 2013, Garcia and
up a lot of relevant problems for OR/MS scholars. Shen 2010). There are strong parallels between capacity
Below, we briefly review the existing research on the investments into electricity transmission networks and
management of natural gas distribution and storage, investments into natural gas pipelines; thus, power
and discuss several open questions in light of the systems literature on transmission network expansions
increasing interdependence of the natural gas and is highly relevant to this stream of research. For exam-
electric power industries. ple, Garcia and Shen (2010) use an equilibrium model
to study capacity expansion of critical energy infras-
3.9.1. Natural Gas Distribution. Pipelines are the tructure, including gas transportation networks,
major delivery mode for natural gas and play a criti- though their main application area is electricity trans-
cal role in matching the supply and demand of natu- mission networks. Coordinated expansion planning of
ral gas across different locations (Secomandi 2010a). electricity and natural gas infrastructures (e.g., Chau-
In the United States, pipeline capacity has not kept up dry et al. 2008, 2014, Unsihuay-Vila et al. 2010, Zhang
with the recent increase in natural gas supply and et al. 2015) is an important area of future research. For
demand, which can cause serious problems for utili- more potential areas of research, we refer the reader to
ties in areas that highly depend on natural gas for survey papers on optimization models for natural gas
power generation. Reliability becomes especially a distribution (Rıos-Mercado and Borraz-Sanchez 2015,
concern on the coldest days during which pipeline Zheng et al. 2010).
constraints force home heating to compete with Market rules and contract designs that govern the
power generation for scarce gas supply. For example, transactions between generators and pipeline compa-
in New England, natural gas is the dominant fuel for nies can play a big role in ensuring power system reli-
generating electricity, but the natural gas pipeline sys- ability, especially in areas with high natural gas
tem within the region is relatively small. In unusually demand and inadequate pipeline capacity. Current
cold winters such as the winter of 2017–18, the region market rules may not be sufficient to efficiently recon-
experiences large spikes in natural gas price and cile natural gas supply and demand (Peress and Karas
wholesale electricity price largely due to pipeline 2017). Consumption profile of gas-fired generators is
capacity constraints.13 Pipeline constraints adversely not consistent with historical pipeline operational
affect not only the power system reliability, but also design. Specifically, most transportation services are
the emission levels since during instances of insuffi- based on the principle of uniform hourly flow
cient natural gas supply or spikes in natural gas price, whereas very few gas-fired plants need steady flows
the grid operators tend to switch to higher-emitting of gas. While ways to overcome this fundamental
options such as power plants using oil or coal. Given inconsistency have been devised (such as multiple
these consequences of pipeline capacity becoming a nomination periods in a day to allow gas-fired plants
binding constraint, research on the management of to change their delivery schedules), it is doubtful that
pipelines becomes ever more relevant. under the current market rules the existing capacity
Pipelines are operated by pipeline companies, who and flexibility is optimally used. Further, there is no
provide transportation services to shippers of natural standardized market construct for pricing various
gas (producers, merchants, or local distribution com- forms of delivery flexibility exercised in practice. As a
panies). Pricing (or valuation) of these services is an result, it is argued that markets do not receive the cor-
important problem in practice. Secomandi (2010a,b) rect price signal to channel investment into the much
analyzes the valuation of pipeline capacity for differ- needed delivery flexibility (Hibbard and Schatzki
ent players in the industry using a real options frame- 2012). On a related note, many gas-fired generators
work. He focuses on point-to-point contracts and contract for interruptible pipeline services, which
shows that pipeline capacity should be priced at its may hinder their ability to produce electricity when
trading value. Secomandi and Wang (2012) study the natural gas demand is high. Yet, firm transportation
valuation of network contracts that allow merchants contracts that improve reliability, which are costlier,
to ship natural gas among more than two locations. are not incentivized by most electric wholesale power
Their method outperforms those in practice because it markets (INGAA 2014). In areas where adequate nat-
is based on using an optimal operating policy for the ural gas supply is crucial to power system reliability,
Table 11 Electric Power Industry Overarching Open Questions
Electric power industry overarching open questions

How should market prices reflect the varying cost of electricity? What is the potential impact of dynamic pricing on capacity investments, demand
response adoption, emission levels, and technology mix of electricity generation portfolios?
Can digital platforms be developed to improve the integration of distributed energy resources into electricity distribution systems? If platforms are widely
adopted, how will incumbent utilities’ roles change and what business models might allow them to remain viable?
How can the electric power industry develop an integrated and comprehensive risk management function that encompasses not only the market risks but
also policy risks? How can the industry better integrate financial and operational hedging for improved risk management?
How will improved understanding of climate change affect the operation of existing assets as well as future capacity investments? What policies are likely
to be robust to alternate climate scenarios and how can policy be better coordinated with operational decision making?
How will electricity storage impact transmission and generation investment, power markets, and emissions? Should markets be redesigned to enable
widespread integration of electricity storage? What is the interplay between technology change and policy?
What policies might foster coordinated hydropower asset investment and operations with renewables to help balance variable generation? How should
policy makers reconcile the needs of the diverse hydropower stakeholder body? How does climate change uncertainty affect hydropower operations,
capacity investments, and the role hydropower can play in achieving climate targets?
What will be the effect of the transition to electric vehicles on the grid and on achieving climate targets? Should policy makers allow/encourage
manufacturers to sponsor proprietary recharging networks or will joint network sponsorship better solve chicken and egg adoption issues?
Given increasing natural gas demand from the power sector, how should the coordination between electricity and gas markets be improved? What
policies should be adopted to increase transportation capacity and storage assets? What are some key possible unintended consequences of policy
changes?
adjustments to market design may be necessary to The problem of evaluating the real option to store
enable gas-fired generators to recover the cost of firm natural gas has been studied in the finance, energy,
pipeline capacity. In short, there are many market and operations management literatures extensively.
design and contract optimization issues to be resolved Analytical valuation of storage options typically does
to facilitate the transactions between generators and not exist because of injection and withdrawal con-
pipeline companies, which present research opportu- straints. Various computational methods have been
nities for OR/MS scholars. developed for storage valuation, including numerical
partial differential equation techniques (Chen and For-
3.9.2. Natural Gas Storage. There is a significant syth 2007, Thompson et al. 2009), binomial and multi-
body of research in OR/MS journals that deals with nomial trees (Felix and Weber 2012), approximate
optimal valuation and operation of natural gas stor- dynamic programming methods based on Monte Carlo
age. Natural gas storage plays a key role in matching simulation (Boogert and De Jong 2008, Carmona and
supply and demand of natural gas. Demand for natu- Ludkovski 2010, Lai et al. 2010), and approximate lin-
ral gas fluctuates significantly; yet, the production of ear programming (Nadarajah et al. 2015). Practitioners
natural gas cannot be immediately adjusted to meet typically employ two heuristic policies to value sea-
the fluctuations in demand, making storage a critical sonal energy storage; the rolling-intrinsic (RI) approach
component of the supply chain. The primary use of and the rolling basket of spread options approach
storage is mitigating the seasonality of demand by (Eydeland and Wolyniec 2003, Gray and Khandelwal
storing excess gas produced in summer to meet the 2004). Lai et al. (2010) find that both heuristics have
peak demand in winter. Natural gas storage is gain- near-optimal performance. Wu et al. (2012) identify the
ing more importance due to the aforementioned conditions under which the RI heuristic deviates from
changes in the demand structure, which brings about optimality and develop methods to bring the RI heuris-
new opportunities for research to OR/MS scholars. tic closer to optimality. Secomandi et al. (2015) use the
In a nutshell, managing a natural gas storage RI heuristic to study the effect of futures term-structure
requires determining an inventory trading policy that model error on the valuation and hedging of natural
tells the merchant how much to buy from the whole- gas storage and to propose approaches to remedy the
sale market and inject into the storage facility, or with- negative effects of model error on hedging. Finally, Lai
draw from the storage and sell into the market, based et al. (2011) is among the few papers that study the val-
on the current natural gas spot price and inventory uation of LNG storage at a regasification terminal. The
levels (Secomandi 2010a,b). Among the first in the lit- main difference between natural gas storage and LNG
erature to analyze this problem, Secomandi (2010a,b) storage lies in the fact that the inflow of commodity
finds that the optimal policy is characterized by two into the storage facility is controllable in the natural gas
time and spot price dependent base-stock targets. Lai case, but not in the LNG case. With the increasing
et al. (2010) extend this work by considering a multi- importance of LNG in the natural gas market, there is
factor forward curve model for price instead of the going to be a need for further research in valuation and
one-factor mean reverting spot price model. operations of LNG terminals and storage.
(MISO), New York (NYISO), Pennsylvania New Jersey

4. Conclusion Maryland (PJM), and Southwest Power Pool (SPP) are the
In this study, we have surveyed over 500 articles pub- ISO/RTOs in the United States and Canada. The rest of
lished in the OR/MS literature with the goal of identi- Canada and Southeast and Northwest regions of the Uni-
ted States are traditionally regulated markets.
fying those papers that address particular problems 3
Power exchanges in Europe include Netherlands (APX),
regarding the electric power industry and with the goal Belgium (Belpex), Germany (EEX), Austria (EXAA), Scan-
of promoting research into a number of critical areas dinavia (NordPool), Poland (PolPX), and France (Pow-
that can benefit from the expertise of the OR/MS com- ernext).
munity. Topics surveyed include renewable integra- 4
Firm service contracts ensure guaranteed service whereas
tion, energy storage, electricity market design, risk interruptible service contracts allow the service provider
management in the electric power industry, the effect (e.g., the utility) to interrupt service when supply is not
of climate policy on the electric power industry, hydro- sufficient to satisfy demand. The total cost of service for
power operations, the electrification of the transporta- an interruptible service contract is usually less than the
tion sector, and the links between electric power and cost of a firm service.
5
natural gas sectors. These areas are all changing rapidly Note that it is possible to reduce the impact of renewable
uncertainty on the grid by improving forecast accuracy for
because of the increased competitiveness of renewable
renewable generation. There is a significant body of
energy technologies, constantly evolving climate pol- research on wind forecasting methods. We refer the reader
icy, improved hydrocarbon production technology, the to Foley et al. (2012) for a review.
lag of gas transport infrastructure buildout, and the 6
Note that there is a longer history in OR that deals with
increasing digitization of the electric grid with the capacity investment related to generation assets other than
implication that power demand might soon become renewable resources as highlighted in Table 1 (e.g., Mur-
much more price elastic. We identified opportunities phy and Smeers 2010, Thompson 2013, Thompson et al.
for contribution to both theory and practice in these 2004, Tseng and Barz 2002).
7
areas and highlighted more than fifty open questions. A renewable portfolio standard is a regulatory instrument
Some of the overarching open questions that will shape that requires a certain percentage of electricity to be gener-
the future of the electric power industry are also sum- ated using renewable energy resources such as wind and
solar. A production tax credit is a tax credit for electricity
marized below in Table 11.
generated by renewable resources whereas an investment
During this revolutionary time in the electric power
tax credit is a tax credit on the basis of the investment for
industry, we believe that the OR/MS community is in installing a renewable energy generation asset. Feed-in tar-
a strong position to provide valuable decision-making iffs are typically used to encourage investment in dis-
support by bringing the necessary operational consid- tributed renewable energy resources, such as roof top
erations into the discussion of electric power policy solar. They are based on guaranteeing a cost-based price
matters. OR/MS scholars are especially well-equipped to the owners of eligible renewable energy assets for the
to solve problems at the intersection of business, eco- electricity they provide to the grid.
8
nomics, and policy. Although there are large litera- PG&E and its parent company were sued in November
tures devoted to the electric power industry that focus 2018, for not properly maintaining its infrastructure and
on technical issues and literatures that focus on policy equipment, which led to the Camp Fire, the deadliest
wildfire in California history. The lawsuit claims that a
matters, we believe that OR/MS scholars can play an
failure in a transmission line was the cause of the fire. On
important role by bridging these focal areas and by January 29, 2019, PG&E filed for bankruptcy in response
recognizing the mutually interacting and dual-causal- to the financial challenges, which is estimated to be more
ity dynamics between operations and public policy. than $16.5 billion, associated with the fire. The chief exec-
utive of the company resigned in the same month.
9
Pollution or emissions abatement refers to any measure
Acknowledgments taken to reduce pollution or emissions.
10
We thank the many seminar participants who provided https://www.iea.org/topics/renewables/subtopics/hyd
feedback, especially Ekundayo Shittu, Elizabeth Wilson, ropower/
11
and the Industry Studies Association conference attendees. https://www.eia.gov/energyexplained/index.php?pa
In addition, we are very grateful to the editors and the ge=natural_gas_use
12
review team whose careful reading and guidance through- https://www.eia.gov/todayinenergy/detail.php?id=
out the review process greatly improved the paper. 14491
13
http://isonewswire.com/updates/2018/4/25/winter-
20172018-recap-historic-cold-snap-reinforces-findings.html
Notes
1
The 2018 State of the Utility, Annual Survey Report by
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Vol. 28, No. 11, November 2019, pp. 2738–2777 DOI 10.1111/poms.

Electric Power Industry: Operational and Public Policy

of natural gas than explicit regulatory policies related

Table 1 A Sample of Electric Power Industry Research in OR/MS Journals

Research topics Selected references

Table 2 Electricity Markets

Research topics Selected references

Table 3 Electricity Markets Open Questions

Electricity markets open research questions

Table 4 Renewable Integration

Research topics Selected references

Open research questions

Table 5 Risk Management in the Electric Power Industry

Research topics Selected references

Open research questions

Research topics Selected references

Open research questions

Table 7 Electricity Storage

Research topics Selected references

Open research questions

Table 8 Hydropower Operations

Research topics Selected references

Open research questions

Table 9 Plug-in Electric and Hybrid Vehicles

Research topics Selected references

Open research questions

Table 10 Natural Gas Industry

Research topics Selected references

Open research questions

Table 11 Electric Power Industry Overarching Open Questions

Electric power industry overarching open questions

(MISO), New York (NYISO), Pennsylvania New Jersey

at https://www.erai.com/CustomUploads/ca/wp/2013_11% Araoz, V., K. J€

Singer, J. I. 2002. Double auctions across a constrained transmis- Str€

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