In this paper we study the problem of long-term capacity adequacy in electricity markets. We implement a dynamic model in which operators compete for investment and electricity production under imperfect Cournot competition. The main aim of this work is to compare three investment incentive mechanisms: reliability options, forward capacity market - which are both market-based - and capacity payments. Apart from the oligopoly case, we also analyze collusion and monopoly cases. Stochastic dynamic programming is used to deal with the stochastic environment of the market (future demand) and mixed complementarity problem formulation is employed to find a solution to this game. The main finding of this study is that market-based mechanisms would be the most cost-efficient mechanism for assuring long-term system adequacy and encouraging earlier and adequate new investments in the system. Moreover, generators would exert market power when introducing capacity payments. Finally, compared with a Cournot oligopoly, collusion and monopolistic situations lead to more installed capacities with market-based mechanisms and increase end-usersà payments.
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Paper provided by Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure in its series Working Papers with number
0905.
Find related papers by JEL classification: C61 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Optimization Techniques; Programming Models; Dynamic Analysis C68 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Computable General Equilibrium Models C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply
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