Generation capacity expansion in imperfectly competitive restructured electricity markets

Investments in generation capacity in restructured electricity systems remain a relatively unexplored subject in the modeling community. We consider three models that differ by their underlying economic assumptions and the degree to which they depart from the old capacity expansion representations. The first model assumes a perfect, competitive equilibrium. It is computationally very similar to the old capacity expansion models even if its economic interpretation is different. The second model (open-loop Cournot game) extends the Cournot model that is sometimes used for modeling operations in restructured electricity systems to include investments in new generation capacities. This model can be interpreted as describing investments in an oligopolistic market where capacity is simultaneously built and sold on long-term contracts when there is no spot market (Power Purchase Agreements). The third model (closed-loop Cournot game) separates the investment and sales decision. It describes a situation where investments are decided in a first stage and sales occur in a second stage, both taking place in oligopolistic markets. The second stage is a spot market. This makes the problem a two-stage game and corresponds to investments in merchant plants where the first stage equilibrium problem is solved subject to equilibrium constraints. Because two-stage models are relatively unusual in discussions of electricity, we characterize the properties of this game and compare them with those of the open-loop game. We show that despite some important differences, the open and closed-loop games share many properties. One of the important results is that the solution of the closed-loop game, when it exists, falls between the solution of the open-loop game and the competitive equilibrium.