Optimal capacity allocation in different markets for generation companies employing the mean-lower partial moments model

In the power industry deregulation era, an power supplier needs to optimal allocate its generation capacities for participating in different markets in order to maximize the return while control the risk of receiving the minimum profit below a certain level. This paper, based on a thorough analysis on the asset allocation problem of power suppliers, performs such an optimization using the proposed mean-return lower partial moment (LPM) model with risk-free asset. According to the theories of expected utility, stochastic dominance and return-risk model, a LPM of 2^th Order (LPM₂) is a third order stochastic dominance (TSD) method while the conventional measures, such as variance, value at risk (VAR) and conditional VAR (CVAR), at most correspond to second order stochastic dominance (SSD). Therefore, the utility function formulated by the LPM₂ can reflect an investor´s mental process. The proposed model was verified by a numerical study using the PJM real market data.