Scenario reduction and scenario tree construction for power management problems

Portfolio and risk management problems of power utilities may be modeled by multistage stochastic programs. These models use a set of scenarios and corresponding probabilities to model the multivariate random data process (electrical load, stream flows to hydro units, and fuel and electricity prices). For most practical problems the optimization problem that contains all possible scenarios is too large. Due to computational complexity and to time limitations this program is often approximated by a model involving a (much) smaller number of scenarios. The proposed reduction algorithms determine a subset of the initial scenario set and assign new probabilities to the preserved scenarios. The scenario tree…