How to interpret near-cost-optimal energy futures economically? Linking modelling to generate alternatives and market equilibria

• Link market equilibria and modelling to generate alternatives in energy system models • Modelling to generate alternatives equivalent to cost-min with extra cost/revenue • Economic interpretation of near-cost-optimal energy futures yields price information • Alternative energy futures optimal & profitable for investors by governmental action • Theoretical findings confirmed numerically with multi-national power system model Energy system models (ESMs) are used in many planning problems of the energy transition. On the one hand, cost-minimising, linear ESMs have a strong connection to profit-maximising agents in competitive markets. This allows for an economic interpretation of modelling results and, under certain assumptions, guarantees their economic feasibility. On the other hand, modelling to generate alternatives (MGA) generates diverse, near-optimal solutions to address structural and parametric uncertainties inherent to ESMs. However, MGA changes the mathematical model formulation and thus, at first sight, jeopardises the economic interpretation and economic feasibility of model results. This paper therefore links MGA and market equilibria to derive an economic interpretation of near-cost-optimal energy futures. First, we introduce a rigorous market-equilibrium interpretation of a linear cost-minimising ESM. Second, we prove equivalence between ESMs with MGA and cost-minimising ESMs with slightly modified cost terms. Third, we link both results to show that ESMs with MGA are equivalent to cost-minimising ESMs with additional cost or revenue terms, which in turn are equivalent to market equilibria of profit-maximising agents that face these additional costs or revenues. For investors, the MGA alternatives are optimal and exactly recover costs if the additional costs or revenues are imposed respectively provided by governments. Finally, we demonstrate and validate our theoretical findings numerically for a multi-national power system model. The novel economic interpretation improves modellers’ understanding of near-cost-optimal energy futures as well as the societal and economic feasibility of energy transition strategies.