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An energy system model for mixed bilateral and pool markets

Investments into renewable energy are increasing rapidly around the world. Energy system models are able to provide insights into optimal investment capacities and thus are widely used to aid the long-term investment decision-making under an electricity market environment. Existing energy system models, however, fail to consider bilateral electricity markets while in reality, these constitute a major part of all energy trades. In this paper, we propose an improved energy system model that endogenously considers mixed bilateral and pool markets. In this model, we also introduce three externality cost items that account for the social cost of technologies, carbon taxes/renewable energy subsidies, and the bilateral product differentiation in the bilateral market, respectively. We start with an equilibrium problem formulation for different market players and next, an equivalent optimization problem is presented. Then, a case study of the pan-European market to reach 95\% emission reduction in 2050 is conducted to demonstrate the model. Different scenarios are constructed to showcase two different usages of product differentiation in the bilateral market, i.e., willingness to pay and exogenous costs. Our main conclusion is that the inclusion of mixed bilateral and pool markets into our enriched energy system model significantly changed the optimal investment capacities, compared to benchmark results from the existing, conventional energy system model. This shows that the inclusion of the bilateral market is of key importance in future investment considerations. Our model is the first of its kind to include this important and realistic bilateral market in energy system models.