Facebook LinkedIn Twitter

IAEE Members and subscribers to The Energy Journal: Please log in to access the full text article or receive discounted pricing for this article.

A Game Theoretic Model for Generation Capacity Adequacy: Comparison Between Investment Incentive Mechanisms in Electricity Markets

In this paper we study the problem of long-term capacity adequacy in electricity markets. We implement a dynamic model in which firms 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 and capacity payments. Apart from the oligopoly case, we also analyze collusion and monopoly cases. Dynamic programming is used to deal with the stochastic environment of the market and mixed complementarity problem and variational inequality formulations are employed to find a solution to the game. The main finding of this study is that market-based mechanisms would be the most cost-efficient mechanism for assuring long-term system capacity adequacy. 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 consumers' payments.

Purchase ( $25 )

Energy Specializations: Energy Modeling – Energy Data, Modeling, and Policy Analysis; Electricity – Markets and Prices

JEL Codes:
E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination
D42 - Market Structure, Pricing, and Design: Monopoly

Keywords: electricity market, investment incentive mechanisms, dynamic programming, complementarity problems, game theory

DOI: 10.5547/ISSN0195-6574-EJ-Vol32-No4-7

Published in Volume 32, Number 4 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.