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Modeling Cournot Competition in an Electricity Market with Transmission Constraints

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  • Bert Willems

Abstract

This paper studies Cournot competition with two generators who share one transmission line with a limited capacityto supply price-taking consumers. In such a game the network operator needs a rule to allocate transmission capacity. Three rules are studied: all-or-nothing, proportional, and efficient rationing. The first result is that if the network operator taxes the whole congestion rent, the generators strategically change their production quantities, such that the network operator obtains no congestion rent. This gives poor incentives for investment in transmission capacity. The second result is that the network operator can create competition among the generators, which can increase welfare. Marginal nodal congestion pricing, which is optimal under perfect competition, is sub-optimal when generators can set their production quantities freely. It does not generate revenue for the network operator, nor does it increase competition among the generators.

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Bibliographic Info

Article provided by International Association for Energy Economics in its journal The Energy Journal.

Volume (Year): Volume23 (2002)
Issue (Month): Number 3 ()
Pages: 95-125

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Handle: RePEc:aen:journl:2002v23-03-a05

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Cited by:
  1. Léautier, Thomas-Olivier, 2014. "Transmission constraints and strategic underinvestment in electric power generation," IDEI Working Papers 816, Institut d'Économie Industrielle (IDEI), Toulouse.
  2. Robert Wilson, 2005. "Supply Function Equilibrium in a Constrained Transmission System," Levine's Bibliography 784828000000000087, UCLA Department of Economics.
  3. Creti, Anna & Fumagalli, Eileen & Fumagalli, Elena, 2010. "Integration of electricity markets in Europe: Relevant issues for Italy," Energy Policy, Elsevier, vol. 38(11), pages 6966-6976, November.
  4. Giabardo, Paolo & Zugno, Marco & Pinson, Pierre & Madsen, Henrik, 2010. "Feedback, competition and stochasticity in a day ahead electricity market," Energy Economics, Elsevier, vol. 32(2), pages 292-301, March.
  5. Guido Pepermans & Bert Willems, 2004. "Ramsey Pricing in a Congested Network with Market Power in Generation: A Numerical Illustration for Belgium," Energy, Transport and Environment Working Papers Series ete0408, Katholieke Universiteit Leuven, Centrum voor Economische Studiën, Energy, Transport and Environment.
  6. Willems, Bert & Rumiantseva, I. & Weigt, H., 2007. "Cournot versus Supply Functions: What Does the Data tell us?," Discussion Paper 2007-023, Tilburg University, Tilburg Law and Economic Center.
  7. Silvester van Koten & Andreas Ortmann, 2012. "Structural versus Behavioral Remedies in the Deregulation of Electricity Markets: An Experimental Investigation Guided by Theory and Policy Concerns," Discussion Papers 2012-36, School of Economics, The University of New South Wales.
  8. Holmberg, Pär & Philpott, Andrew, 2012. "Supply Function Equilibria in Networks with Transport Constraints," Working Paper Series 945, Research Institute of Industrial Economics.
  9. Léautier, Thomas-Olivier, 2014. "Transmission constraints and strategic underinvestment in electric power generation," TSE Working Papers 13-459, Toulouse School of Economics (TSE).
  10. Guido Pepermans & Bert Willems, 2005. "The Potential Impact of Cross-Ownership in Transmission: an Application to the Belgian Electricity Market," Center for Economic Studies - Discussion papers ces0503, Katholieke Universiteit Leuven, Centrum voor Economische Studiën.

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