We design our models with a view to providing the most accurate and complete answer given the realities of the marketplace. In developing our models, we deploy insightful techniques, adopt the world’s best practice, and focus on five core modelling principles:
- Proven performance – All Aurora models must be capable of reproducing important historical time series with a high degree of accuracy
- Simplicity – Our models are parsimonious, yet they capture the complexity of the world. We take care to ensure our models are not ‘black boxes’, but transparent and well-documented
- Fit-for-purpose – Energy markets cannot be modelled separately from each other or from the economy as a whole. Our modelling framework incorporates the critical energy market dependencies, providing a consistent simulation of potential market outcomes
- Interconnectivity – Our models are designed to speak to each other. We ensure that they share common notation and programming language. Only integrated modelling approaches produce consistent results
- Theoretical accuracy – We draw heavily on economic theory to complement our extensive model databases. Because energy systems are governed by well-known physical relationships, they often exhibit non-linear relationships consistent with existing theory, which are difficult to identify by mining data. As a consequence, data-only approaches to forecasting energy variables perform poorly over the medium- to long-run, a period over which major shifts often occur. Our approach of combining empirically verified theory with data overcomes this problem
Our global general equilibrium model provides a long-term view on fuel prices, production, and consumption by region.
The model is the first of its kind, linking a global general equilibrium energy model (developed by building on the widely-used GTAP database) with a high-resolution resource extraction algorithm based on a cost-minimisation solver algorithm.
The model acknowledges the substantial potential for inter-fuel substitution, as well as interactions with the global economy rather than treating non-energy sectors as exogenous model inputs. It includes detailed modelling of sectoral and economy-wide energy demand with a special focus on energy intensive industries.
Such a modelling framework is crucial to guarantee internally consistent scenarios. Several energy majors have already commissioned Aurora to help them develop holistic multi-fuel long-term outlooks, across several scenarios, based on the model’s capabilities.
Our power market models are electricity capacity and dispatch models forecasting prices, spreads, capacity additions, and plant dispatch, and all related indicators such as carbon emissions, to 2040 in the GB and EU electricity markets respectively. These large-scale models are distinct from other market models in their representation of advanced features such as endogenous balancing, embedded generation and self-consumption benefits, capacity markets, and the capturing of stochastics as fluctuations from increased renewables penetration become ever more dominant.
Both models use the fuel input prices generated by Aurora’s global general equilibrium model. In creating our power market models, Aurora developed a novel model calibration approach using databases of European greenhouse gas emissions to more accurately estimate power plant characteristics.
Aurora is challenging the way in which electricity consumption is modelled.
The standard approach to energy modelling typically assumes electricity consumption is unresponsive to changes in prices. By linking detailed models of electricity demand and electricity supply, Aurora is able to capture the complex features and interplay between supplying and consuming participants in the electricity market.
Additionally, the power market models differentiate themselves from other models through meticulous modelling of non-standard, competitive capacity auctions through which future system capacity additions can be procured, as well as through further refined financial modelling as a basis for individual plants’ capacity decisions. Since December 2014 a capacity auction is one of the two critical sources of revenue in the Great Britain electricity market. It is likely that over the next decade several other major European electricity markets will follow Great Britain. Adding this feature to the model required the coding on an optimisation algorithm (with some similarities to a Newton-Raphson algorithm) to enable the model to determine an equilibrium outcome similar to one that would be observed in a competitive market.
Aurora’s global gas dispatch model contains an unprecedented level of detail on global infrastructure providing long-term projections for the global gas markets.
We draw from our in-house suite of models to ensure full consistency throughout our outlooks. We combine the capabilities of both our general equilibrium model and our electricity market modelling platforms to provide global projections for supply and demand, including a detailed view on gas-for-power, to support our gas model. This enables us to capture the complex interactions between energy markets and the global economy, as well as substitutions between different fuels.
Within our global gas market model, we represent the complexity of gas markets with economic accuracy through sophisticated modelling. Our modelling reconciles short-term market behaviour, such as infra-annual supply flexibility, with long-term economics, such as investments in capacity additions. In Europe, we model the entire transport pipeline network, gas storage facilities, interconnectors, LNG terminal and gas extraction nodes to understand physical constraints and bottlenecks.
The global LNG market is modelled in detail. We geocode each and every liquefaction and regasification terminal and simulate the behaviour of the entire fleet of LNG carriers.
Consequently, the global gas market model provides a wide range of outputs, including prices, flows and assets performance, with high granularity. These results underpin our quarterly outlook on European gas markets, but also inform our studies on global gas markets, valuations of infrastructure assets, strategic analysis, security of supply stress-tests, market design assessments, and others.