Endogenous Investment Decisions in Natural Gas Equilibrium Models with Logarithmic Cost Functions
AbstractThe liberalisation of the natural gas markets and the importance of natural gas as a transition fuel to a low-carbon economy have led to the development of several large-scale equilibrium models in the last decade. These models combine long-term market equilibria and investments in infrastructure while accounting for market power by certain suppliers. They are widely used to simulate market outcomes given different scenarios of demand and supply development, environmental regulations and investment options. In order to capture the specific characteristics of natural gas production, most of these models apply a logarithmic production cost function. However, no model has so far combined this cost function type with endogenous investment decisions in production capacity. Given the importance of capacity constraints in the determination of the natural gas supply, this is a serious shortcoming of the current literature. This paper provides a proof that combining endogenous investment decisions and a logarithmic cost function yields indeed a convex minimization problem, paving the way for an important extension of current state-of-the-art equilibrium models.
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Bibliographic InfoPaper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 1253.
Length: 9 p.
Date of creation: 2012
Date of revision:
Natural gas; equilibrium model; endogenous investment; capacity expansion; logarithmic cost function;
Other versions of this item:
- Huppmann, Daniel, 2013. "Endogenous production capacity investment in natural gas market equilibrium models," European Journal of Operational Research, Elsevier, vol. 231(2), pages 503-506.
- C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
- Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
- L71 - Industrial Organization - - Industry Studies: Primary Products and Construction - - - Mining, Extraction, and Refining: Hydrocarbon Fuels
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-12-06 (All new papers)
- NEP-ENE-2012-12-06 (Energy Economics)
- NEP-REG-2012-12-06 (Regulation)
- NEP-RES-2012-12-06 (Resource Economics)
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