Market competition and strategic choices of electric power sources under fluctuating demand

This study investigates how the introduction of a competitor affects the behavior of an incumbent electricity producer who is a former local monopolist. We especially focus on its implications for the incumbent's capacity choice between two different electric power sources: one technology with a relatively high production cost (peak-load technology), which is represented by gas-fired power generation, and the other with a relatively high capacity-building cost (base-load technology), which is represented by nuclear power generation. We assume that the entrant does not have access to the latter technology and also that demand fluctuates over time, as is typically the case with an electricity market. Surprisingly, the introduction of a competitor increases the capacity of nuclear power generation if and only if the nuclear technology is sufficiently inefficient. This result also implies that the introduction of a competitor competition tends to decrease the nuclear capacity when the level of carbon tax, which tends to raise the relative production cost of gas-fired power generation, is sufficiently high.