Abstract
Long-term energy market models can be used to examine investments in production technologies, however, with market liberalisation it is crucial that such models include investment risks and investor behaviour. This paper analyses how the effect of investment risk on production technology selection can be included in large-scale partial equilibrium models of the power market. The analyses are divided into a part about risk measures appropriate for power market investors and a more technical part about the combination of a risk-adjustment model and a partial-equilibrium model. To illustrate the analyses quantitatively, a framework based on an iterative interaction between the equilibrium model and a separate risk-adjustment module was constructed. To illustrate the features of the proposed modelling approach we examined how uncertainty in demand and variable costs affects the optimal choice of production technologies.