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Investment in Electricity Markets with Asymmetric Technologies

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  • Talat S. Genc

    ()
    (Department of Economics,University of Guelph)

  • Henry Thille

    ()
    (Department of Economics, University of Guelph)

Abstract

We study competition between hydro and thermal electricity generators under de- mand uncertainty. Producers compete in quantities and each is constrained: the ther- mal generator by capacity and the hydro generator by water availability. We analyze a two-period game emphasizing the incentives for capacity investments by the ther- mal generator. We characterize both Markov perfect and open-loop equilibria. In the Markov perfect equilibrium, investment is discontinuous in initial capacity and higher than it is in the open-loop equilibrium. However, since there are two distortions in the model, equilibrium investment can be either higher or lower than the ecient investment.

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Bibliographic Info

Paper provided by University of Guelph, Department of Economics and Finance in its series Working Papers with number 0909.

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Length: 18 pages
Date of creation: 2009
Date of revision:
Handle: RePEc:gue:guelph:2009-09.

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Keywords: Electricity markets; Dynamic game; Duopoly; Capacity investment.;

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  1. Garcia, Alfredo & Reitzes, James D & Stacchetti, Ennio, 2001. "Strategic Pricing when Electricity is Storable," Journal of Regulatory Economics, Springer, vol. 20(3), pages 223-47, November.
  2. Stefan Ambec & Joseph Doucet, 2003. "Decentralizing hydro power production," Canadian Journal of Economics, Canadian Economics Association, vol. 36(3), pages 587-607, August.
  3. Roques Fabien A. & Newbery David M. & Nuttall William J., 2005. "Investment Incentives and Electricity Market Design: the British Experience," Review of Network Economics, De Gruyter, vol. 4(2), pages 1-36, June.
  4. Crampes, C. & Moreaux, M., 2001. "Water resource and power generation," International Journal of Industrial Organization, Elsevier, vol. 19(6), pages 975-997, May.
  5. Peter Cramton & Steven Stoft, 2006. "The Convergence of Market Designs for Adequate Generating Capacity," Papers of Peter Cramton 06mdfra, University of Maryland, Department of Economics - Peter Cramton, revised 2006.
  6. Reynolds, Stanley S, 1986. "Strategic Capital Investment in the American Aluminum Industry," Journal of Industrial Economics, Wiley Blackwell, vol. 34(3), pages 225-45, March.
  7. Bushnell, James & Wolfram, Catherine, 2008. "Electricity Markets," Staff General Research Papers 31547, Iowa State University, Department of Economics.
  8. Genc, Talat S. & Reynolds, Stanley S. & Sen, Suvrajeet, 2007. "Dynamic oligopolistic games under uncertainty: A stochastic programming approach," Journal of Economic Dynamics and Control, Elsevier, vol. 31(1), pages 55-80, January.
  9. Genc, Talat S. & Sen, Suvrajeet, 2008. "An analysis of capacity and price trajectories for the Ontario electricity market using dynamic Nash equilibrium under uncertainty," Energy Economics, Elsevier, vol. 30(1), pages 173-191, January.
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