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Investment in electricity markets with asymmetric technologies

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  • Genc, Talat S.
  • Thille, Henry

Abstract

Capacity investments in electricity markets is one of the main issues in the restructuring process to ensure competition and enhance system security of networks. We study competition between hydro and thermal electricity generators under demand uncertainty. Producers compete in quantities and each is constrained: the thermal generator by capacity and the hydro generator by water availability. We analyze a two-period game emphasizing the incentives for capacity investments by the thermal 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 efficient investment.

Suggested Citation

  • Genc, Talat S. & Thille, Henry, 2011. "Investment in electricity markets with asymmetric technologies," Energy Economics, Elsevier, vol. 33(3), pages 379-387, May.
  • Handle: RePEc:eee:eneeco:v:33:y:2011:i:3:p:379-387
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    References listed on IDEAS

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    1. 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.
    2. Garcia, Alfredo & Reitzes, James D & Stacchetti, Ennio, 2001. "Strategic Pricing when Electricity is Storable," Journal of Regulatory Economics, Springer, pages 223-247.
    3. Reynolds, Stanley S, 1986. "Strategic Capital Investment in the American Aluminum Industry," Journal of Industrial Economics, Wiley Blackwell, vol. 34(3), pages 225-245, March.
    4. Crampes, C. & Moreaux, M., 2001. "Water resource and power generation," International Journal of Industrial Organization, Elsevier, pages 975-997.
    5. Stefan Ambec & Joseph Doucet, 2003. "Decentralizing hydro power production," Canadian Journal of Economics, Canadian Economics Association, vol. 36(3), pages 587-607, August.
    6. 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, pages 173-191.
    7. 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, pages 1-36.
    8. Bushnell, James & Wolfram, Catherine, 2008. "Electricity Markets," Staff General Research Papers Archive 31547, Iowa State University, Department of Economics.
    9. Cramton, Peter & Stoft, Steven, 2007. "Why We Need to Stick with Uniform-Price Auctions in Electricity Markets," The Electricity Journal, Elsevier, vol. 20(1), pages 26-37.
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    Cited by:

    1. Moita, Rodrigo Menon Simões & Monte, Daniel, 2017. "Competition in cascades," Textos para discussão 456, FGV/EESP - Escola de Economia de São Paulo, Getulio Vargas Foundation (Brazil).
    2. Lamadrid, Alberto J. & Maneevitjit, Surin & Mount, Timothy D., 2016. "The economic value of transmission lines and the implications for planning models," Energy Economics, Elsevier, pages 1-15.
    3. Robles, Jack, 2016. "Infinite horizon hydroelectricity games," Working Paper Series 5075, Victoria University of Wellington, School of Economics and Finance.

    More about this item

    Keywords

    Electricity markets Dynamic game Duopoly Capacity investment;

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities

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