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Risk trading in capacity equilibrium models

Author

Listed:
  • D'Aertrycke, G.
  • Ehrenmann, A.
  • Ralph, D.
  • Smeers, Y.

Abstract

We present a set of power investment models, the class of risky capacity equilibrium problems, reflecting different assumptions of perfect and imperfect markets. The models are structured in a unified stochastic Nash game framework. Each model is the concatenation of a model of the short-term market operations (perfect competition or Cournot), with a long-term model of investment behavior (risk neutral and risk averse behavior under different assumptions of risk trading). The models can all be formulated as complementarity problems, some of them having an optimization equivalent. We prove existence of solutions and report numerical results to illustrate the relevance of market imperfections on welfare and investment behavior. The models are constructed and discussed as two stage problems but we show that the extension to multistage is achieved by a change of notation and a standard assumption on multistage risk functions. We also treat a large multistage industrial model to illustrate the computational feasibility of the approach.

Suggested Citation

  • D'Aertrycke, G. & Ehrenmann, A. & Ralph, D. & Smeers, Y., 2017. "Risk trading in capacity equilibrium models," Cambridge Working Papers in Economics 1757, Faculty of Economics, University of Cambridge.
    • Handle: RePEc:cam:camdae:1757
    Note: dr241
    as

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    File URL: http://www.econ.cam.ac.uk/research-files/repec/cam/pdf/cwpe1757.pdf
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    Citations

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    Cited by:

    1. Kramer, Anja & Krebs, Vanessa & Schmidt, Martin, 2021. "Strictly and Γ-robust counterparts of electricity market models: Perfect competition and Nash–Cournot equilibria," Operations Research Perspectives, Elsevier, vol. 8(C).
    2. Amigo, Pía & Cea-Echenique, Sebastián & Feijoo, Felipe, 2021. "A two stage cap-and-trade model with allowance re-trading and capacity investment: The case of the Chilean NDC targets," Energy, Elsevier, vol. 224(C).
    3. Mays, Jacob & Morton, David P. & O’Neill, Richard P., 2021. "Investment effects of pricing schemes for non-convex markets," European Journal of Operational Research, Elsevier, vol. 289(2), pages 712-726.

    More about this item

    Keywords

    Capacity expansion; spot market; perfect or Cournot competition; risk aversion; risk trading; complete or incomplete risk market; coherent risk measure; risky capacity equilibria;
    All these keywords.

    JEL classification:

    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • D25 - Microeconomics - - Production and Organizations - - - Intertemporal Firm Choice: Investment, Capacity, and Financing
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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