Investment in Electricity Markets with Asymmetric Technologies

We study competition between hydro and thermal electricity generators under de- mand uncertainty. Producers compete in quantities and each is constrained: the ther- mal generator by capacity and the hydro generator by water availability. We analyze a two-period game emphasizing the incentives for capacity investments by the ther- mal 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 ecient investment.Electricity markets; Dynamic game; Duopoly; Capacity investment.

Equilibrium Predictions in Wholesale Electricity Markets

We review supply function equilibrium models and their predictions on market outcomes in the wholesale electricity auctions. We discuss how observable market characteristics such as capacity constraints, number of power suppliers, load distribution and auction format affect the behavior of suppliers and performance of the market. We specifically focus on the possible market power exerted by pivotal suppliers and the comparison between discriminatory and uniform-price auctions. We also describe capacity investment behavior of electricity producers in the restructured industry.Electricity markets; Supply function equilibrium; Markov perfect equilibrium; electricity auctions; pivotal suppliers; capacity investment.

Investment Dynamics: Good News Principle

We study a dynamic Cournot game with capacity accumulation under demand uncertainty, in which the investment is perfectly divisible, irreversible, and productive with a lag. We characterize equilibrium investments under closed-loop and S-adapted open-loop information structures. Contrary to what is established usually in the dynamic games literature with deterministic demand, we find that the firms may invest at a higher level in the open-loop equilibrium (which in some cases coincides with Markov perfect equilibrium) than in the closed-loop Nash equilibrium. The rankings of the investment levels obtained in the two equilibria actually depend on the initial capacities and on the degree of asymmetry between the firms. We also observe, contrary to the bad news principle of investment, that firms may invest more as demand volatility increases and they invest as if high demand (i.e., good news) will unfold in the future.Capacity Investment, Dynamic Games, S-adapted Open-Loop Equilibrium, Closed-loop Equilibrium.

Capacity expansion in liberalized electricity markets with locational pricing and renewable energy investments.

We study the long-term incentives for expanding production capacity in liberalized electricity markets. How does electricity market design affect the prices of energy, capacity and social welfare? And how is this capacity market affected by the geographical features of the electricity market? Should the system operator design the capacity market to provide incentives for investment in renewable technologies? We analyze the conditions under which capacity payments and markets enable higher investment relative to an energy-only market in which generators sell electricity but not capacity. We show that capacity markets benefit consumers and investors by increasing investment and reliability and capping peak prices. We prove that generators benefit from owning a portfolio of peak and baseload plants and show that investment strategies must consider regional capacity auctions. We demonstrate that a capacity payment per technology increases investment in renewable technologies and leads to the early retirement of older, carbon-emitting technologies. Regional capacity investment targets effectively decrease energy prices and significantly increase investment in renewable technologies

Transmission and wind investment in a deregulated electricity industry

Adoption of dispersed renewable energy technologies requires transmission network expansion. Besides the transmission system operator (TSO), restructuring of electricity industries has introduced a merchant investor (MI), who earns congestion rents from constructing new lines. We compare these two market designs via a stochastic bi-level programming model that has either the MI or the TSO making transmission investment decisions at the upper level and power producers determining generation investment and operation at the lower level while facing wind power variability. We find that social welfare is always higher under the TSO because the MI has incentive to boost congestion rents by restricting capacities of transmission lines. Such strategic behaviour also limits investment in wind power by producers. However, regardless of the market design (MI or TSO), when producers behave a la Cournot, a higher proportion of energy is produced by wind. In effect, withholding of generation capacity by producers prompts more transmission investment since the TSO aims to increase welfare by subsidising wind and the MI creates more flow to maximise profit

Strategic Generation Capacity Choice under Demand Uncertainty:Analysis of Nash Equilibria in Electricity Markets

Abstract: We analyze a two-stage game of strategic firms facing uncertain demand and exerting market power in decentralized electricity markets. These firms choose their generation capacities at the first stage while anticipating a perfectly competitive future electricity spot market outcome at the second stage; thus it is a closed loop game. In general, such games can be formulated as an equilibrium problem with equilibrium constraints (EPEC) and examples have been posed in the literature that have multiple or no equilibria. Therefore, it is of interest to define general sets of conditions under which solutions exist and are unique, which would enhance the value of such models for policy andmarket intelligence purposes. In this paper, we consider various types of such a closed loop model regarding the underlying price-demand relations (elastic and inelastic demand), the assumed demand uncertainty with a broad class of continuous distributions, and any finite number of players with symmetric or asymmetric costs. We establish sufficient conditions for the random demand’s probability distribution which guarantee existence and uniqueness of equilibria in most of the cases of this closed loop model. We identify a broad class of commonly used continuous probability distributions satisfying these conditions

NATGAS: a model of the European natural gas market

The NATural GAS model is an integrated model of the European wholesale gas market providing long-run projections of supply, transport, storage and consumption patterns in the model region, aggregated in 5-year periods, distinguishing two seasons (winter and summer). Model results include levels of investment in the various branches, output and consumption, depletion of reserves and price levels. The NATGAS model computes long-term effects of policy measures on future gas production and gas prices in Europe. NATGAS is an equilibrium model describing behaviour of gas producers, investors in infrastructure (pipeline, LNG capacity, as well as storage), traders and consumers. NATGAS covers the main European demand regions, including the United Kingdom, Germany, the Netherlands and Italy. Moreover, it covers the main origins of supply on the European market, such as Russia, Norway, Algeria, the Netherlands, the United Kingdom and LNG. In this memorandum, we first discuss the theoretical background as well as the model specifications. Afterwards, we describe the data we used, present some results and assess validity by computing sensitivities and comparing with current developments.

Strategic investment decisions under the nuclear power debate in Belgium [WP]

In view of the current nuclear power debate in Belgium, we analyze how uncertainty about a nuclear phase-out, coupled with the implementation of renewable energy subsidies and nuclear taxes, affects investment capacity and productivity decisions by Belgian electricity suppliers. To achieve this goal, considering the key characteristics of the Belgian market, we build a Stackelberg closed-loop (two-stage) equilibrium model in which investment decisions are made in a first stage under uncertainty regarding a nuclear phase-out, and productivity decisions are subsequently made in a second stage in a c ertainty environment. Our analysis indicates that, regardless of subsidies, an increase in the probability of nuclear license extension results in lower levels of investment - primarily in renewable energy -, lower total production and a higher electricity price. We also show that the implementation of renewable energy subsidies reduces the effect of an increase in probability of nuclear license extension on producer’s decisions regarding expanded capacity and on total profits in the market

Essays in Energy Economics

This thesis presents four essays in energy economics. The first essay investigates one of the workhorse models of resource economics, the Hotelling model of an inter-temporally optimizing resource extracting firm. The Hotelling model provides a convincing theory of fundamental concepts like resource scarcity, but very few empirical validations of the model have been conducted. This essay attempts to empirically validate the Hotelling model by first expanding it to include exploration activity and market power and then using a newly constructed data set for the uranium mining industry to test whether a major resource extracting mining firm in the industry is following the theory’s predictions. The results show that the theory is rejected in all considered settings. The second and third essays investigate the difference in market outcomes under spot-market based trade as compared to long-term contract based trade in oligopolistic markets with investments. The second essay investigates analytically the difference in market outcomes in an electricity market setting, showing that investments and consumer welfare may be higher under spot-market based trade than under long-term contracts. The third essay proposes techniques to solve large-scale models of this kind, empirically, by exploring the practicability of this approach in an application to the international metallurgical coal market. The final essay investigates the influence of policy uncertainty on investment decisions. With France debating the role of nuclear technology, this essay analyses how policy uncertainty regarding nuclear power in France may feature in the French and European power sector. Applying a stochastic model for the European power system, the analysis shows that the costs of uncertainty in this particular application are rather low compared to the overall costs of a nuclear phase-out

A Tri-level Model of Centralized Transmission and Decentralized Generation Expansion Planning for an Electricity Market: Part I

We develop a tri-level model of transmission and generation expansion planning in a deregulated power market environment. Due to long planning/construction lead times and concerns for network reliability, transmission expansion is considered in the top level as a centralized decision. In the second level, multiple decentralized GENCOs make their own capacity expansion decisions while anticipating a wholesale electricity market equilibrium in the third level. The collection of bi-level games in the lower two levels forms an equilibrium problem with equilibrium constraints (EPEC) that can be approached by either the diagonalization method (DM) or a complementarity problem (CP) reformulation. We propose a hybrid iterative solution algorithm that combines a CP reformulation of the tri-level problem and DM solutions of the EPEC sub-problem