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A Dynamic Oligopolistic Electricity Market with Interdependent Market Segments

We propose a deterministic, discrete-time, finite-horizon oligopoly model to investigate investment and production equilibrium strategies, in a setting where demand evolves over time and the two market-segment loads (peak-and base-load) are interdependent. The players (generators) compete a` la Cournot, open-loop Nash equilibria are computed and numerical results are discussed. The model is calibrated with data from Ontario, Canada. We assess the impact on equilibrium strategies of a generation sector with more market power than what is actually the case. We also find a slight difference in the investment sequence when interdependent demand segments are considered. Finally, we analyze the impact of increasing demand elasticities over time, and varying the financial values of the production capacities that remain at the end of the planning horizon. We believe that such a tool is valuable for professionals and scholars interested in the dynamics of production capacity mix (portfolio of technologies) in the electricity sector. It is also of paramount importance for public decision makers who have to simultaneously deal with environmental issues and with price control, both of which are politically sensitive.

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Energy Specializations: Energy Modeling – Energy Data, Modeling, and Policy Analysis; Electricity – Transmission and Network Management; Electricity – Markets and Prices ; Electricity – Policy and Regulation

JEL Codes:
E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination
D44 - Auctions
D42 - Market Structure, Pricing, and Design: Monopoly
E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General

Keywords: Investment Dynamics, Ontario Electricity Market, Oligopoly, Dynamic Games, Nash Equilibrium, Interdependent Market Segments

DOI: 10.5547/ISSN0195-6574-EJ-Vol32-No4-9

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