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Generation Capacity Expansion in Imperfectly Competitive Restructured Electricity Markets

Author

Listed:
  • Frederic H. Murphy

    () (Fox School of Business and Management, Temple University, Philadelphia, Pennsylvania 19122)

  • Yves Smeers

    () (Department of Mathematical Engineering and Center for Operations Research and Econometrics, Université Catholique de Louvain, Voie du Roman Pays 34, 1348 Louvain-la-Neuve, Belgium)

Abstract

We consider three models of investments in generation capacity in restructured electricity systems that differ with respect to their underlying economic assumptions. The first model assumes a perfect, competitive equilibrium. It is very similar to the traditional capacity expansion models even if its economic interpretation is different. The second model (open-loop Cournot game) extends the Cournot model to include investments in new generation capacities. This model can be interpreted as describing investments in an oligopolistic market where capacity is simultaneously built and sold in long-term contracts when there is no spot market. The third model (closed-loop Cournot game) separates the investment and sales decision with investment in the first stage and sales in the second stage—that is, a spot market. This two-stage game corresponds to investments in merchant plants where the first-stage equilibrium problem is solved subject to equilibrium constraints. We show that despite some important differences, the open- and closed-loop games share many properties. One of the important results is that the prices and quantities produced in the closed-loop game, when the solution exists, fall between the prices and quantities in the open-loop game and the competitive equilibrium.

Suggested Citation

  • Frederic H. Murphy & Yves Smeers, 2005. "Generation Capacity Expansion in Imperfectly Competitive Restructured Electricity Markets," Operations Research, INFORMS, vol. 53(4), pages 646-661, August.
  • Handle: RePEc:inm:oropre:v:53:y:2005:i:4:p:646-661
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    File URL: http://dx.doi.org/10.1287/opre.1050.0211
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    1. repec:eee:eneeco:v:65:y:2017:i:c:p:304-314 is not listed on IDEAS
    2. repec:eee:appene:v:204:y:2017:i:c:p:831-845 is not listed on IDEAS
    3. Lam, W., 2015. "Competiton in the Market for Flexible Resources: an application to cloud computing," CORE Discussion Papers 2015034, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    4. Lam, Wing Man Wynne, 2014. "Competition in the Market for Flexible Resources: an application to cloud computing," TSE Working Papers 14-518, Toulouse School of Economics (TSE).
    5. repec:eee:energy:v:143:y:2018:i:c:p:1029-1047 is not listed on IDEAS
    6. repec:eee:ejores:v:261:y:2017:i:2:p:755-771 is not listed on IDEAS
    7. repec:eee:ejores:v:261:y:2017:i:3:p:971-983 is not listed on IDEAS
    8. repec:kap:netspa:v:17:y:2017:i:2:d:10.1007_s11067-016-9336-8 is not listed on IDEAS
    9. repec:eee:ejores:v:268:y:2018:i:1:p:161-173 is not listed on IDEAS
    10. repec:eee:eneeco:v:64:y:2017:i:c:p:272-285 is not listed on IDEAS
    11. Dietrich, Kristin & Leuthold, Florian & Weigt, Hannes, 2009. "Will the Market Get it Right? The Placing of New Power Plants in Germany," MPRA Paper 65653, University Library of Munich, Germany.
    12. repec:eee:eneeco:v:64:y:2017:i:c:p:55-62 is not listed on IDEAS
    13. repec:eee:ejores:v:262:y:2017:i:2:p:449-463 is not listed on IDEAS
    14. Thomas-Olivier Léautier, 2016. "The Visible Hand: Ensuring Optimal Investment in Electric Power Generation," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2).
    15. repec:eee:ejores:v:266:y:2018:i:3:p:1086-1099 is not listed on IDEAS

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