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A game theoretic model for generation capacity adequacy in electricity markets: A comparison between investment incentive mechanisms


  • Mohamed Haikel Khalfallah

    () (University of Lyon, Lyon, F-69003, France; CNRS, UMR 5824, GATE, Ecully, F-69130, France; ENS LSH, Lyon, F-69007, France)


In this paper we study the problem of long-term capacity adequacy in electricity markets. We implement a dynamic model in which operators compete for investment and electricity production under imperfect Cournot competition. The main aim of this work is to compare three investment incentive mechanisms: reliability options, forward capacity market - which are both market-based - and capacity payments. Apart from the oligopoly case, we also analyze collusion and monopoly cases. Stochastic dynamic programming is used to deal with the stochastic environment of the market (future demand) and mixed complementarity problem formulation is employed to find a solution to this game. The main finding of this study is that market-based mechanisms would be the most cost-efficient mechanism for assuring long-term system adequacy and encouraging earlier and adequate new investments in the system. Moreover, generators would exert market power when introducing capacity payments. Finally, compared with a Cournot oligopoly, collusion and monopolistic situations lead to more installed capacities with market-based mechanisms and increase end-usersí payments.

Suggested Citation

  • Mohamed Haikel Khalfallah, 2009. "A game theoretic model for generation capacity adequacy in electricity markets: A comparison between investment incentive mechanisms," Working Papers 0905, Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon.
  • Handle: RePEc:gat:wpaper:0905

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    References listed on IDEAS

    1. Frank R. Lichtenberg, 2004. "The expanding pharmaceutical arsenal in the war on cancer," 2004 Meeting Papers 204, Society for Economic Dynamics.
    2. Martin, Stephen & Rice, Nigel & Smith, Peter C., 2008. "Does health care spending improve health outcomes? Evidence from English programme budgeting data," Journal of Health Economics, Elsevier, vol. 27(4), pages 826-842, July.
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    Cited by:

    1. Nolan, Sheila & Devine, Mel & Lynch, Muireann A. & O’Malley, Mark, 2017. "The effect of Demand Response and wind generation on electricity investment and operation," Papers WP577, Economic and Social Research Institute (ESRI).
    2. Nolan, Sheila & Devine, Mel & Lynch, Muireann & O'Malley, Mark, 2016. "Impact of Demand Response Participation in Energy, Reserve and Capacity Markets," MPRA Paper 74672, University Library of Munich, Germany.

    More about this item


    Electricity markets; capacity adequacy; dynamic programming; Nash-Cournot model; mixed complementarity problem;

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices

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