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

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  • Khalfallah Mohamed Haikel

Abstract

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.

Suggested Citation

  • Khalfallah Mohamed Haikel, 2011. "A Game Theoretic Model for Generation Capacity Adequacy: Comparison Between Investment Incentive Mechanisms in Electricity Markets," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 117-158.
    • Handle: RePEc:aen:journl:32-4-a06
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    Cited by:

    1. Bublitz, Andreas & Keles, Dogan & Zimmermann, Florian & Fraunholz, Christoph & Fichtner, Wolf, 2018. "A survey on electricity market design: Insights from theory and real-world implementations of capacity remuneration mechanisms," Working Paper Series in Production and Energy 27, Karlsruhe Institute of Technology (KIT), Institute for Industrial Production (IIP).
    2. Ströbele Wolfgang, 2013. "Ordnungspolitische und Sachprobleme der Energiewende / Problems of the turnaround in energy policy in Germany after 2011," ORDO. Jahrbuch für die Ordnung von Wirtschaft und Gesellschaft, De Gruyter, vol. 64(1), pages 253-274, January.
    3. Bublitz, Andreas & Keles, Dogan & Zimmermann, Florian & Fraunholz, Christoph & Fichtner, Wolf, 2019. "A survey on electricity market design: Insights from theory and real-world implementations of capacity remuneration mechanisms," Energy Economics, Elsevier, vol. 80(C), pages 1059-1078.

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    JEL classification:

    • F0 - International Economics - - General

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