IDEAS home Printed from https://ideas.repec.org/a/inm/oropre/v53y2005i4p646-661.html
   My bibliography  Save this article

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
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1287/opre.1050.0211
    Download Restriction: no

    References listed on IDEAS

    as
    1. Schmalensee, Richard, 1981. "Economies of Scale and Barriers to Entry," Journal of Political Economy, University of Chicago Press, vol. 89(6), pages 1228-1238, December.
    2. Paul L. Joskow, 1998. "Electricity Sectors in Transition," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 25-52.
    3. Dixit, Avinash, 1980. "The Role of Investment in Entry-Deterrence," Economic Journal, Royal Economic Society, vol. 90(357), pages 95-106, March.
    4. David M. Newbery, 1998. "Competition, Contracts, and Entry in the Electricity Spot Market," RAND Journal of Economics, The RAND Corporation, vol. 29(4), pages 726-749, Winter.
    5. P. Massé & R. Gibrat, 1957. "Application of Linear Programming to Investments in the Electric Power Industry," Management Science, INFORMS, vol. 3(2), pages 149-166, January.
    6. Blaise Allaz, 1992. "Oligopoly, uncertainty and strategic forward transactions," Post-Print hal-00511812, HAL.
    7. Jean J. Gabszewicz & Sougata Poddar, 1997. "Demand fluctuations and capacity utilization under duopoly," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 10(1), pages 131-146.
    8. Hendrik Bessembinder & Michael L. Lemmon, 2002. "Equilibrium Pricing and Optimal Hedging in Electricity Forward Markets," Journal of Finance, American Finance Association, vol. 57(3), pages 1347-1382, June.
    9. Blaise Allaz & Jean-Luc Vila, 1993. "Cournot Competition, Forward Markets and Efficiency," Post-Print hal-00511806, HAL.
    10. A. Michael Spence, 1977. "Entry, Capacity, Investment and Oligopolistic Pricing," Bell Journal of Economics, The RAND Corporation, vol. 8(2), pages 534-544, Autumn.
    11. Green, Richard, 1999. "The Electricity Contract Market in England and Wales," Journal of Industrial Economics, Wiley Blackwell, vol. 47(1), pages 107-124, March.
    12. Rajnish Kamat & Shmuel Oren, 2004. "Two-settlement Systems for Electricity Markets under Network Uncertainty and Market Power," Journal of Regulatory Economics, Springer, vol. 25(1), pages 5-37, January.
    13. Allaz, Blaise, 1992. "Oligopoly, uncertainty and strategic forward transactions," International Journal of Industrial Organization, Elsevier, vol. 10(2), pages 297-308, June.
    14. Sherali, Hanif D. & Soyster, Allen L. & Murphy, Frederic H. & Sen, Suvrajeet, 1982. "Linear programming based analysis of marginal cost pricing in electric utility capacity expansion," European Journal of Operational Research, Elsevier, vol. 11(4), pages 349-360, December.
    15. David M. Kreps & Jose A. Scheinkman, 1983. "Quantity Precommitment and Bertrand Competition Yield Cournot Outcomes," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 326-337, Autumn.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    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. Brown, David P., 2018. "Capacity payment mechanisms and investment incentives in restructured electricity markets," Energy Economics, Elsevier, vol. 74(C), pages 131-142.
    7. repec:eee:energy:v:150:y:2018:i:c:p:1006-1017 is not listed on IDEAS
    8. repec:eee:ejores:v:261:y:2017:i:2:p:755-771 is not listed on IDEAS
    9. repec:eee:ejores:v:261:y:2017:i:3:p:971-983 is not listed on IDEAS
    10. repec:kap:netspa:v:17:y:2017:i:2:d:10.1007_s11067-016-9336-8 is not listed on IDEAS
    11. repec:eee:juipol:v:55:y:2018:i:c:p:14-30 is not listed on IDEAS
    12. repec:eee:ejores:v:268:y:2018:i:1:p:161-173 is not listed on IDEAS
    13. repec:eee:eneeco:v:64:y:2017:i:c:p:272-285 is not listed on IDEAS
    14. 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.
    15. Andreas Ehrenmann & Yves Smeers, 2011. "Generation Capacity Expansion in a Risky Environment: A Stochastic Equilibrium Analysis," Operations Research, INFORMS, vol. 59(6), pages 1332-1346, December.
    16. Gregor Zöttl, 2010. "A Framework of Peak Load Pricing with Strategic Firms," Operations Research, INFORMS, vol. 58(6), pages 1637-1649, December.
    17. repec:eee:eneeco:v:64:y:2017:i:c:p:55-62 is not listed on IDEAS
    18. repec:eee:ejores:v:262:y:2017:i:2:p:449-463 is not listed on IDEAS
    19. 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).
    20. Alfredo Garcia & Zhijiang Shen, 2010. "Equilibrium Capacity Expansion Under Stochastic Demand Growth," Operations Research, INFORMS, vol. 58(1), pages 30-42, February.
    21. repec:eee:ejores:v:266:y:2018:i:3:p:1086-1099 is not listed on IDEAS
    22. Frederic Murphy & Yves Smeers, 2010. "On the Impact of Forward Markets on Investments in Oligopolistic Markets with Reference to Electricity," Operations Research, INFORMS, vol. 58(3), pages 515-528, June.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:oropre:v:53:y:2005:i:4:p:646-661. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mirko Janc) The email address of this maintainer does not seem to be valid anymore. Please ask Mirko Janc to update the entry or send us the correct email address. General contact details of provider: http://edirc.repec.org/data/inforea.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.