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Modeling Electricity Markets as Two-Stage Capacity Constrained Price Competition Games under Uncertainty

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  • Sakellaris, Kostis

Abstract

The last decade has seen an increasing application of game theoretic tools in the analysis of electricity markets and the strategic behavior of market players. This paper focuses on the model examined by Fabra et al. (2008), where the market is described by a two-stage game with the firms choosing their capacity in the first stage and then competing in prices in the second stage. By allowing the firms to endogenously determine their capacity, through the capacity investment stage of the game, they can greatly affect competition in the subsequent pricing stage. Extending this model to the demand uncertainty case gives a very good candidate for modeling the strategic aspect of the investment decisions in an electricity market. After investigating the required assumptions for applying the model in electricity markets, we present some numerical examples of the model on the resulting equilibrium capacities, prices and profits of the firms. We then proceed with two results on the minimum value of price caps and the minimum required revenue from capacity mechanisms in order to induce adequate investments.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 23317.

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Date of creation: Mar 2010
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Handle: RePEc:pra:mprapa:23317

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Keywords: Capacity Constraints; Electricity Markets; Regulatory Policy; Strategic Behaviour;

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References

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  1. Willems, Bert & Rumiantseva, I. & Weigt, H., 2007. "Cournot Versus Supply Functions: What does the Data Tell us?," Discussion Paper 2007-63, Tilburg University, Center for Economic Research.
  2. von der Fehr, Nils-Henrik Morch & Harbord, David, 1993. "Spot Market Competition in the UK Electricity Industry," Economic Journal, Royal Economic Society, vol. 103(418), pages 531-46, May.
  3. de Frutos, María-Ángeles & Fabra, Natalia, 2011. "Endogenous capacities and price competition: The role of demand uncertainty," International Journal of Industrial Organization, Elsevier, vol. 29(4), pages 399-411, July.
  4. Anette Boom, 2007. "Vertically Integrated Firms' Investments in Electricity Generating Capacities," CIE Discussion Papers 2007-14, University of Copenhagen. Department of Economics. Centre for Industrial Economics.
  5. Paul L. Joskow, 2006. "Competitive Electricity Markets And Investment In New Generating Capacity," Working Papers 0609, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research.
  6. ZOETTL, Gregor, 2008. "On investment decisions in liberalized electricity markets: the impact of price caps at the spot market," CORE Discussion Papers 2008037, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  7. ZOETTL, Gregor, 2008. "Investment decisions in liberalized electricity markets: A framework of peak load pricing with strategic firms," CORE Discussion Papers 2008041, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  8. Ventosa, Mariano & Baillo, Alvaro & Ramos, Andres & Rivier, Michel, 2005. "Electricity market modeling trends," Energy Policy, Elsevier, vol. 33(7), pages 897-913, May.
  9. Biglaiser, Gary & Vettas, Nikolaos, 2004. "Dynamic Price Competition with Capacity Constraints and Strategic Buyers," CEPR Discussion Papers 4315, C.E.P.R. Discussion Papers.
  10. Tishler, Asher & Milstein, Irena & Woo, Chi-Keung, 2008. "Capacity commitment and price volatility in a competitive electricity market," Energy Economics, Elsevier, vol. 30(4), pages 1625-1647, July.
  11. de Frutos, Maria-Angeles & Fabra, Natalia & Von der Fehr, Nils-Henrik M, 2008. "Investment Incentives and Auction Design in Electricity Markets," CEPR Discussion Papers 6626, C.E.P.R. Discussion Papers.
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Cited by:
  1. Li, Yung-Ming & Jhang-Li, Jhih-Hua, 2011. "Analyzing online B2B exchange markets: Asymmetric cost and incomplete information," European Journal of Operational Research, Elsevier, vol. 214(3), pages 722-731, November.

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