The Impact of Uncertainty on the European Energy Market: The scenario aggregation method
We develop a stochastic numerical equilibrium model of the Western European energy markets. Both economic uncertainty with respect to future fossil fuel prices and GDP growth rates, and political uncertainty with respect to future climate policy, are analyzed. It is demonstrated that the equilibria under uncertainty differ significantly from the deterministic outcomes. Our approach to solve the numerical model builds on scenario aggregation, a numerical method developed to solve decision problems under uncertainty.