Optimal Control of Energy Production in a Market with Emission Allowances

Abstract

With a growing awareness for preserving the environment, governments started to regulate the greenhouse gas emissions of energy producers by implementing markets for CO2 allowances. Such markets can be found in the European Union with the Emission Trading Scheme (EU ETS). The CO2 emission permit trading is one approach to provide incentives to the power firms to reduce their CO2 emission. This thesis proposes two models for an optimal control of the energy production rate depending on the energy unit price as well as on the trading of emission derivatives. One model aims to maximize the wealth of the power firm on the short term basis, whereas the other model focuses on the long term wealth maximization. This thesis examines different ways to solve these optimal control problems using techniques like the Hamilton-Jacobian-Bellman equation or convex optimization and compares the different results.