Abstract: This paper proposes methods for medium- and long

term scheduling in hydrothermal power systems with different

emissions quota schemes included. Based on techniques used for
hydropower scheduling, which has similarities to quota handling,
a solution for quota schemes with a fixed volume is established
using stochastic dual dynamic optimization techniques (SDDP).
Handling stochastic elements is a part of hydropower scheduling;
in the paper we extend the SDDP approach adding quota markets
with uncertain prices to the optimization model. Using the above
approaches a set of options for handling quota systems is
available, accounting for the situation that even though quotas
are on the international agenda it is still uncertain exactly what
quota scheme will be adapted. The paper presents results from
two cases of quota modeling together with a description of the
current Danish quota system. The first case shows modeling of a
fixed quota and the second case deal with a quota market with
uncertain prices.

Index Terms: Stochastic optimization, interconnected power
systems, hydrothermal scheduling, emission quotas, stochastic
dual dynamic programming, quota markets, price uncertainty.
I. INTRODUCTION
REEN house gas emissions have been on the international
agenda for some time, but it is still uncertain exactly what
quota scheme will be implemented. In the near future, it is
likely that individual national approaches will be implemented
in some countries, in addition to regional approaches in some
areas like the European Union (EU). It is expected that in the
long run global systems will be enforced, simply based on the
argument that a global problem needs global addressing. The
power sector is a major contributor to green house gas
emissions, especially CO
2
emission, through the use of fossil
fuels. In Denmark a quota system with fixed volumes and rules
for banking and transferring of quotas has already been
established for the power sector. This is a typical first step
approach starting with major contributors in a sector where the
emissions can easily be measured. International CO
2
quotas
are traded among or within companies that wish to present an
environmentally friendly profile; this is rare, and in addition its
effects are uncertain due to the lack of established rules for
measuring and accounting. Definition and implementation of
quota schemes are only at the beginning of a long process, but
the basic two approaches are a fixed volume quota or a quota
market in some form. Both approaches are addressed and the
methods used may also be applied to combinations of these
approaches. Most of the mathematical methods are described
in other references [1] - [5] and this paper focuses on the adap-
tation of these methods to the problem of quota modeling. Two


cases representing the two main classes of quota systems are
presented and discussed in the paper.
II. QUOTA SCHEMES AND IMPACT ON MODELING
This section discusses the different quota schemes and the
challenge these scenarios give from a modeling point of view.
It is difficult to foresee exactly how future environmental
constraints will be defined and organized, and this will
probably also change over time. However, two principally
different directions are:
1. Given quotas for each player in the market, no trading
of quotas.
2. Given quotas for each player, free trading of quotas
for all industry within an area or global trading of
quotas.
Combinations of these two are also possible, but these will in
many aspects work like alternative two. Assuming that these
are the possible scenarios for handling of quotas, what
problems are evident and need a solution, and who is the target
group for these solutions? This is further discussed below. The
brackets are used for indicating the target group.
1. Given quotas for each player in the market, no trading of
quotas:
a. What is the effect on electricity prices of different
quotas and how does it affect the competitiveness of the
different energy carriers? (Policy makers, players.)
b. What is the effect on electricity trade between
countries? (Policy makers, players.)
c. How should a given quota be used optimally?
(Players.)
2. Given quotas for each player, free trading of quotas for all
industry within an area or global trading of quotas:
a. What is the consequence on electricity prices of
different emission markets and quota allocation, and
how does it affect the competitiveness of the different
energy carriers? (Policy makers, players.)
b. What is the effect on trade of electricity between
countries? (Policy makers, players.)
c. How will the emissions in each country be affected?
(Policy makers.)
d. What will future quota prices be? (Players.)
e. How should a quota be used or traded optimally for
given forecasts of future quota prices? (Players.)
The classification indicates that the interesting problems are
very much the same for all quota-trading arrangements.
However, this does not imply that the solution methods should
be the same, as the preferable solution will depend on the
assumptions that are possible to make for each option. The
methods and models described in this paper will focus on the
Quota Modeling in Hydrothermal Systems
M. M. Belsnes, A. Haugstad and B. Mo, SINTEF Energy Research, P. Markussen, Elsam
G
0-7803-7967-5/03/$17.00 2003 IEEE
Paper accepted for presentation at 2003 IEEE Bologna Power Tech Conference, June 23th-26th, Bologna, Italy

global problems of interest both to policy makers and most
market players, although the methods might also be applied to
some local problems of specific interest to players. Utiliza-
tion of a given quota for a producer is an example of a local
problem.
III. MODELING PRINCIPLES
The power system is broken down into to a number of areas
connected by transmission lines with stipulated capacities. An
area model is an aggregate description of the power system in
the area combining: hydropower generation, thermal
generation, consumption, contracts and power exchange into a
local power market. An area definition may typically reflect
borders between countries, variation in precipitation
conditions and known bottlenecks in the transmission system.
In a long-term model these simplifications has to be made in
order to model the total energy system including stochastic
elements for as much as ten years ahead. Some important
short-term features have to be omitted. An example is start
cost for generation units. For hydropower it can be argued that
this is a valid simplification, but for thermal units it will
influence on the commitment pattern and hence the marginal
cost.
A. Reservoirs and hydropower generation
Hydropower must obey the reservoir balance:
0
, , 1 , , , 1 ,
= + +
+ t i t i t i t i t i
v s q x x (1)
t i
t i t i
x x x ,
, ,
(2)
Where:
i is the area number, i 1,..., A.
t is the interval number, t 1, ..., N.
x
i,t
is the start volume in the interval t.
x
i,t+1
is the volume at the interval end.
q
i,t
is the discharge in interval t.
s
i,t
is the spill in interval t.
v
1,i,t
is the inflow in interval t.

Hydropower production is given by:

=
=
seg N
j
t j i j i t i
q P
_
1
, , , ,
) ( (3)

t i
seg N
j
t j i
t i
Q q Q
,
_
1
, ,
,


=
(4)

t i t i
t i
q v Q
, min, , , 2
,
+ = (5)

=
=
seg N
j
t j i t i
q q
_
1
, , ,
(6)
Where:

i,j
is efficiency of the jth segment.
v
2,i,t
is non-storable inflow.
q
min,i,t
is the minimum discharge constraint.
t i
Q
,
is the minimum discharge.
t i
Q
,
is the maximum discharge.
q
i,j,t
is the discharge at the jth segment.

This description makes it possible to account for reduced
efficiency when the areas hydropower generation increases.
This improves the modeling of prices, especially when genera-
tion capacity is stressed.
In the hydropower model the storable inflow v
1
and non-
storable inflow v
2
are modeled stochastically.
B. Thermal units, contracts and transmission
Thermal units are modeled individually. Units producing only
electrical energy are characterized by a fixed kWh price but
may have capacity limits that vary over the year. Generation
from CHP-units is based on a fixed minimum electrical
production level given by the heat consumption, but if addition
capacity exists electricity generation may be increased. Units
in backpressure modes have a fixed electricity generation in
the model. For each unit with available capacity a volume and
a price is added in the energy balance equation. A quadratic
cost function as used in many publications may be handled as a
number of artificial units where each unit is a step on a curve
fitting to the quadratic cost curve. A function G
i,t
is defined
giving the total thermal cost.

=
=
units
j
t j i t j i t i
g G
1
, , , , ,
(7)

t j i t j i
g g
, , , ,
0 (8)
Where:

i,j,t
is the marginal cost for the unit.
t j i
g
, ,
is the unit production.
t j i
g
, ,
is the upper limit for unit generation.

Contracts can be modeled much in the same way:

=
=
Contracts
j
t j i t j i t i
vol C
1
, , , , ,
(9)
t j i
t j i
vol vol , ,
, ,
0 (10)
Where:
C
i,t
is the total contract cost.

i,j,t
is the contract price; 0 for purchase.
vol
i,j,t
is the contract volume bought or sold.

Transmission lines make it possible to exchange energy with
surrounding areas. Transmission can trigger not only losses but
also a transmission cost. Output from a transmission line is
equal to input minus losses. A transmission line open in both
directions will result in two variables.

= =
=
Lines
j k
t j k t j k t
t T
1
2
1
, , , ,
(11)
t j k
t j k
t t , ,
, ,
0 (12)

Where:
T
t
is the total transmission cost.
k indicates the direction.

k,j,t
is the transmission price for direction k.
t
k,j,t
is the volume transmitted in direction k.

The total cost of transactions are defined by L:

t
A
i
t i
A
i
t i t
T C G L + + =

= = 1
,
1
,
(13)
The following subsets of M are defined for area i:
M
p
is all thermal options.
M
c
is all contracts.
M
t,1
is transmission import to area i.
M
t,2
is transmission export from area i.

Then the energy balance for the area i can be defined as:
( )
0
1
, ,
, , , , , , , , ,
2 ,
1 ,
=
+ + +

t i
M j
t j
M j
t j t j
M j
t j i t j i
M j
t k i t i
D t
t c g P
t
t c p

(14)
Where:

j,t
is the loss factor for transmission, [0;1]

i,j,t
is 1 or 1 depending on the sign of

Finally the objective is to minimize the objective function over
all possible future inflow sequences:
min ( )} {
1
1 ,
1

=
+
=
+
A
i
N i i
N
t
t
x S L E (15)
Where:
S
i
is the value of water stored at the end of interval t=N

It is possible to use stochastic dynamic programming (SDP), in
which case the multi reservoir aspect has to be solved in a
simplified manner, e.g. by heuristics [1]. A better approach is
to use stochastic dual dynamic programming (SDDP) ([2] and
[3]) to solve the optimization problem, since this allows a
much greater number of state variables, i.e. reservoirs, in the
optimization problem. The SDDP approach is used in this
paper.
IV. MODELING FIXED QUOTAS
This section describes the basic method used for optimizing
hydrothermal power systems with fixed quotas. Using an
equivalent hydropower model it is possible to interpret a quota
as a reservoir with a given volume and inflow. The problem to
solve would then be to establish the optimal strategy for utili-
zation of the limited resource the quota reservoir will repre-
sent.
For a fixed quota we use the concept that a quota can be
seen as an individual reservoir in the model and fossil fired
units which represent transactions given by (7) and (8) can be
represented by linear equivalents and be transformed to the
transmission transaction type (11) and (12) instead.
This approach is illustrated in Fig. 1, where each CO
2

emitting unit will receive its resources from a common quota
through an accountancy equation (16)-(18), which converts the
CO
2
quota into electricity generation.
H yd r o t h e rm a l
A re a
1 2 3 N
=

Cost
Quota Area
P
max
CO
2
CO
2
CO
2

Fig. 1 Plant equivalent for quota usage.

Each thermal unit is described by the factors:
g is maximum production capacity (MW).
is marginal production cost (NOK/MWh).
C
pu
is CO
2
emission per produced unit of energy (kg
CO
2
/kWh).

The linear transformation from CO
2
quota to heat or electricity
is calculated as follows:

pu
co
C
1
2
= (16)

pu
co
C

=
2
(17)

pu cap
C g CO =
, 2
(18)
Where:

CO2
is CO
2
efficiency.

CO2
is CO
2
cost.
CO
2,cap
is CO2 plant equivalent capacity.

The CO
2
efficiency factor is the conversion factor between
CO
2
and energy. The cost of generated electricity depends on
the marginal production cost, emissions per produced kWh
electricity and in addition the calculated expected marginal
value of CO
2
remaining in the quota. It is possible to allow for
banking when using the hydropower equivalent by increasing
the quota reservoir above the value of received quota.
V. MODELING QUOTA MARKETS
In this section it is assumed that there exists a liquid market for
quota trading. It is also assumed that the modeled electricity
system can be seen as a price taker in the quota market. Future
quota prices are uncertain and thus modeled as a stochastic
variable. Equation (7) is transformed to:


t j i
units
j
t j i t j i t i
g c G
, ,
1
, , , , ,
) ( + =

=
(19)

t j i co t t j i
C c
, , , ,
2
= (20)
Where:
c
i,j,t
is the CO
2
-based marginal price for each unit.
C
t
is the CO
2
market price.

It is c
i,j,t
and thus (
i,j,t
+ c
i,j,t
) that will be stochastic. We use an
extension to the basic SDDP solution technique as described in
[5] to solve this stochastic formulation of quota costs on
thermal power plants. Reference [4] describes the price model
also used in this new SDDP based market model. Correlation
between exogenous CO
2
prices and inflow to the system may
be included, and are in our case included in the simulation
part. In the next chapter we show an example of quota price
scenarios from which a quota price model can be constructed.
VI. CASES
This chapter describes two cases used to illustrate the methods
proposed in the theoretical part of the paper. Two examples
are presented: one with fixed quota volumes and one with a
stochastic quota price. In addition the current active quota reg-
ulation in Denmark is described as background for the cases.
A. The Danish quota regulation
The Danish CO
2
quota regulation was implemented in January
2001. The regulation only covers the electricity generation
sector and an absolute quota was set for the years 2001 to
2003.
The quota is allocated without cost each year to 8 specified
Danish electricity producers according to their emissions from
1994-1998. CO
2
emissions from generators with emissions
below 100.000 tonnes CO
2
/year and part of the CO
2
emissions
from combined heat and power production are excluded from
the trading system but the emissions are still a part of the
absolute quota. The quota in Western and Eastern Denmark is
allocated mainly to the two largest generators Elsam and
Energi E2, and they receive almost 90% of the quota.
The regulation allows banking of allowances. The banking
is restricted through of a yearly constant limit of 20 Mill.
tonnes CO
2
. This has as a consequence that excess quotas
above the banking limit cannot be saved for the next periods.

TABLE I
QUOTA ALLOCATION TO ELECTRICITY GENERATORS IN THE DANISH CO2
REGULATION

Mill. tonnes CO
2
2001

2002 2003
Saving limit
DK-West 11,84 11,01 10,47
DK-East 8,33 7,58 7,7
Outside scheme 1,83 1,83 1,83
Total quota 22 21 20
In a situation of non-compliance the companies must pay a
penalty of 40 NOK/t CO
2
. It is not possible to buy quotas from
companies not eligible for the scheme.
At the time of writing the Danish Government has still not
decided what to do in 2004. It is expected that the EU direc-
tive proposal for a EU quota market will be agreed upon
among the EU-member countries and implemented from 2005.
The EU directive proposal is in principle equal to the current
Danish regulation with the largest difference being a EU wide
market with the inclusion of other sectors and project reduc-
tions, higher penalties, and allocation to units instead of com-
panies.
B. Fixed volume quotas in Denmark
This case focuses on the modeling of fixed quotas. The
volumes from Table 1 are used with some modifications due to
combined heat and power generation. The system is modeled
without banking options, and without any quota compensation
for export to neighboring countries.
The basic model for Denmark together with connections to
neighboring countries is illustrated in Fig. 2. Hydropower
areas such as Norway and Sweden (including Finland) consist
of several smaller areas. In the case model a total of 23 areas
are included.
.
Belgium
Norway
Quota
East
Quota
West
Dk-West
Dk-East
Germany
Sweden
Nederland
Poland

Fig. 2 Aggregated model description of Northern Europe. Denmark is
modeled in DK-West (Jutland) and DK-East (Zealand).

Using the modeling illustrated in Fig. 1 and described by (16)-
(18) the areas Quota-West and Quota-East can be established
imposing the constraints from Table 1 on the power system.
The two areas with fixed quotas will get slightly different
results and impact also surrounding areas. As the results are
not the main theme of the paper only some results for the DK-
West area are shown here. The utilization of the quota is
shown in Fig. 3.
Simulated quota prices are in NOK/ton CO
2
for Quota West
is shown in Fig. 4. The price variation is caused by demand
and inflow uncertainty. The Nordic power system is very much
influenced by hydropower in Norway, Sweden and Finland.
The quota price can be interpreted as a marginal value of the
quota how much would an extra ton of CO
2
with connected
production capacity be worth in this particular week.
The low prices shown for the CO
2
quota indicate that the

quota is not constraining thermal generation very much. The
impact from the quota in DK West is therefore not great. A
smaller quota would increase quota prices and the impact on
market prices in DK West.
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
10000
1 6 11 16 21 26 31 36 41 46 51
Week number
R
e
s
t

a
m
o
u
n
t

o
f

C
O
2

q
u
o
t
a

(
T
o
n
)
Average
0-percentile
25-percentile
75-percentile
100-percentile
Fig. 3 Quota usage for the Quota West area. The curves show remaining
CO2 quota.
0
2
4
6
8
10
12
14
16
18
20
1 21 41 61 81 101
Week number
M
a
r
g
i
n
a
l

q
u
o
t
a

v
a
l
u
e

(
N
O
K
/
t
o
n

C
O
2
)
Average
0-percentile
25-percentile
75-percentile
100-percentile

Fig. 4. Quota prices for the Quota West area

The quota price in the Quota West area can be interpreted as a
quota price forecast and for comparison reasons this forecast is
used to give quota prices for the next case.
Even though the quota prices are low the constraint will
impact on the distribution between the thermal power plants in
the area. In the table below the data for two coal fueled
thermal units are given shown in Table II.
TABLE II
UNIT DATA FOR ENSTED AND ESBJERG
Unit CO
2,cap
(MW) C
pu
(C0
2
/kWh) (NOK/MWh)
Ensted 537 0,849 115,0
Esbjerg 291 0,789 108,0

Fig. 5 shows that simulated expected production in Esbjerg
is not affected by the quota while the production in Ensted is
reduced significantly. This is reasonable because Ensted has
higher marginal production costs and lower CO
2
efficiency.

The present implementation can be used to model:
1. Local emission constraints, e.g. on a national level
2. Regional emission constraints, e.g. a future European
quota system.
Both types can be combined with banking from period to
period.

Fig.5 Unit production for reference case (without quotas) and case with
endogen quota.
C. Quota market
A similar model as shown in Fig. 2 is used in the calculation.
The quota area Quota West is removed and the generation
units in Denmark West are now described according to (19)
and (20), where the price forecast for the CO
2
is obtained from
results calculated in case I. The marginal quota prices
illustrated in Fig. 4 are used to establish a stochastic model for
the quota price.
Compared to a reference calculation without quota con-
straints it is to be expected that introduction of an additional
constraint will increase prices in the system. This is also the
case as shown in Fig. 6; the price in a system with a CO
2
quota
is higher. The result also shows that the price with an external
(exogenous) given quota market is higher than with an
endogenous quota constraint. Because the calculated marginal
quota values from the endogenous case is used as quota market
prices in Case 2, one would expect the results to be similar but
not equal.

Fig. 6. Comparison of average market prices for the cases.

The two types of modelling have a parallel to mathematical
decomposition techniques where the endogenous case
corresponds to the optimal solution and the exogenous case
correspond to a decomposition using marginal quota prices.
In our case we have a quota that gives small marginal quota
0
100
200
300
400
500
600
0 8 16 24 32 40 48 56 64 72 80 88 96 104
Week number
P
r
o
d
u
c
t
i
o
n

(
M
W
)
Ensted ref.
Ensted quota
Esbjerg ref.
Esbjerg quota
114
116
118
120
122
124
126
128
130
132
134
53 57 61 65 69 73 77 81 85 89 93 97 101
Week number
M
a
r
k
e
t

p
r
i
c
e

(
N
O
K
/
M
W
h
)
Without quota
Endogen quota
Exogen quota

prices compared to the electricity price. It is therefore difficult
to evaluate the simulated price for the three cases in Fig. 6. We
will in the future test the model with quotas that are more
limiting. This will give us results where it is easier to see the
effect of the quota prices on the system operation. So far we
have verified that the new model can be applied to both fixed
quotas and to model an external quota market. The results
seem reasonable but more cases have to be run in order to fully
verify the new model.

The proposed method can help individual producers to
adapt to uncertainty in quota prices or by government bodies
to analyze system behavior for different quota price forecasts.
Other areas where such modeling can be used are modeling the
general uncertainty in fuel prices.
VII. COMPUTATIONAL CONSIDERATIONS
Computation for a multistage stochastic model is quite time
consuming. In the case of a fixed quota we have calculation
times of about 2 hours on a HPUX 9000/782 using CPLEX as
the optimization kernel.
Adding stochastic price also adds one dimension to the
optimization problem and thus increases the calculation time
to 14 hours for the same problem.
Using this type of model for the whole European power
system is possible because the hydropower part of the model
can be aggregated into bigger areas. In the same way
hydropower aggregation tends to ignore precipitation
differences, and local bottlenecks in the transmission system
may be ignored limiting the number of areas needed in a
European model.
VIII. DISCUSSION
In order to obtain precise results for an interconnected
power system a lot of effort has to be put into establishing the
case data. It has not been possible to model in detail the whole
European power system. The cases are therefore concentrated
on the northern part of the system and the target has been to
demonstrate the proposed methods and getting principal
correct results.
IX. CONCLUSION
The paper describes how methodology from medium and
long-term modeling of hydrothermal power systems can be
adapted to the challenges of modeling emission quota systems.
We have specifically solved the problems of a fixed quota,
which imposed an integral constraint on the system, and the
more complex problem of how to model uncertain quota
prices.
The cases demonstrate that the approach is feasible and that
results from mathematical modeling of different quota types
can be used to show differences in terms of impact on power
prices and competition structures for fuel types in the power
market.
X. REFERENCES
Papers from Conference Proceedings (Published):
[1] O. J. Botnen et al., Modelling of hydropower scheduling in a
national/international context, in Hydropower 92, E. Broch and D. K.
Lysne, Eds., Rotterdam, 1992, A. A. Balkema.
[2] M. V. F. Pereira, Optimal stochastic operations scheduling of large
hydroelectric systems, Electrical Power & Energy Systems, vol 11, no.
3, pp. 161-169, July 1989.
[3] M. V. F. Pereira and L. M. V. G. Pinto, Multistage stochastic optimi-
zation applied to energy planning, Mathematical Programming, vol.
52, pp. 359-375, 1991.
[4] B. Mo, A. Gjelsvik, A. Grundt and K. Kresen, Optimisation of Hydro-
power Operation in a Liberalised Market with Focus on Price Modell-
ing, 2001 Porto Power Tech Proceedings, vol.1, 10-13 September 2001
[5] A. Gjelsvik, M. M. Belsnes and A. Haugstad, An algorithm for
stochastic medium-term hydrothermal scheduling under spot price
uncertainty, Proceedings 13
th
Power Systems Computation Conference,
Trondheim, Norway, June 28-July 2
nd
, 1999, pp. 1079-0185.

Web sites:
[6] Bill on CO2 Quotas for Electricity Production, Act no. 376 of 2 June
1999, http://www.ens.dk/graphics/Publikationer/Laws/Bill_235.pdf
XI. BIOGRAPHIES
Michael Martin Belsnes was born in Denmark, on
August 28, 1967. He received his MSc from DTU in
1995, and has been employed at SINTEF Energy Re-
search since then. He has worked with models for hydro-
power scheduling, integration of distributed energy,
mainly wind power, and lately models for the CO2 quota
challenge.


Birger Mo received his M.Sc. in 1986 and a Ph.D. in
1991 in Engineering Cybernetics from the Norwegian
Institute of Technology. He has since 1986 been
employed at SINTEF Energy Research. His main interests
are short-term forecasting, production planning and risk
management.


Arne Haugstad was born in Portland, Oregon, USA on
August 15, 1954. He received his M.Sc. in Electrical
Engineering from the Norwegian Institute of Technology
in 1978. He has since 1979 been employed at SINTEF
Energy Research, working mainly with model
development in the field of hydro- and hydro/thermal
scheduling.


Peter Markussen has been employed in the Department
for Business Development and Optimization at Elsam
since 2001. He has an Masters Degree in Political
Science and studies in Economics from Aarhus Univer-
sity. He has been involved in the corporate strategies on
Climate Change, including the trading on the Danish
CO2-emissions market and the preparation for a possible
EU-scheme for CO2 -emissions trade.