Risk Management Of Generation Companies Using Prospect Theory

With the development of market-oriented reforms in power industry, lots of newtechnical problems gradually appear.In the generation-side market which is theearliest open,gencos have become the firm that operate independently andself-financing,they can achieve more profits by strategic bidding.But the risk factorswhich is due to the uncertainties in the market affect gencos’ the realization ofbenefits.Therefore,how to make a reasonable bidding strategy so that the gencos canmaximize their own profits and minimize their own risk,which has become the mosturgent porblem for the gencos.From the perspective of bounded rationality,the gencos’bidding strategy in a single market and multi-market have been studied.Firstly, the common bidding m et ho ds which are based on the traditional riskdecision theory have been present:such as m ean-v ar i a nce、VaR/CVaR and so on,anda brief dissertation is given about the shortage of these methods in describing thegencos’actual bidding behavior,by this the concept of bounded rationality ispresent.Then the basic content of bounded rationality and the behavioral decisiontheory for the study of bounded rationality problem are introduced, in which focus onthe theoretical basis of this paper-Prospect Theory.Besides, the applicability aboutProspect Theory on the problem of gencos’bidding strategy has also beendiscussed.For this, this paper will use the Prospect Theory which has been widelyused in the area of economic and management to study the problem of electircitymarket.Base on the framework of Prospect Theory, the value function and weightfunction of gencos in a single market and multi-market have been analyzed,and then ageneration energy allocation decision-making model, in which the psychologicalfactors are taken into account,is built respectively.The influences of value functionand weight function on bidding decision of gencos are simultaneously considered inthose two models.By means of computing prospect utility values of gencos underdifferent allocation schemes,the obtained scheme with maximum prospect value istaken as the optimal strategy for gencos.Fanally,by using the Matlab to simulate themodel,the feasibility and effectiveness of this method are verified by the results.Compared to the traditional decision-making model for bidding, the bidding strategyof gencos is study from another point of view in this model, the results show that this method can meet the psychological desire of gencos much better and provide a newway of thinking for the problem of gencos’bidding strategy.