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A Stochastic Game Model Applied to the Nordic Electricity Market

In: Stochastic Programming Applications in Finance, Energy, Planning and Logistics

Author

Listed:
  • Stein-Erik Fleten

    (Department of Industrial Economics and Technology Management, Norwegian University of Science and Technology, Trondheim, Norway)

  • Tek Tjing Lie

    (Department of Electrical & Electronic Engineering, Auckland University of Technology, New Zealand)

Abstract

The paper presents an investigation of market power potential in a deregulated hydro and thermal based electricity market through a two-stage stochastic Cournot model. The optimal hydro and forward strategies are examined when generation companies take into account the commitment effect of these decisions, i.e. the influence on the future play of opponents. The generation capacity of each company is regarded as given. In the first stage, firms decide on forward contracting, hydro and thermal generation (including nuclear) for the current spot market. In the second stage, they learn about water inflows to reservoirs before deciding on generation for the second stage spot market. Using cost and capacity data and historical inflow series from the Scandinavian market, large pure hydro producers are found to have little or no market power on the seasonal level, and that the largest producer, Vattenfall, has some incentive to withdraw capacity from the market. The simulated price in an oligopoly case is less than 7% higher than under perfect competition, thus the market is expected to be reasonably competitive. Still, competition authorities should monitor and possibly prevent market concentration to increase.

Suggested Citation

  • Stein-Erik Fleten & Tek Tjing Lie, 2013. "A Stochastic Game Model Applied to the Nordic Electricity Market," World Scientific Book Chapters, in: Horand I Gassmann & William T Ziemba (ed.), Stochastic Programming Applications in Finance, Energy, Planning and Logistics, chapter 15, pages 421-441, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789814407519_0015
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    Cited by:

    1. Bigerna, Simona & Wen, Xingang & Hagspiel, Verena & Kort, Peter M., 2019. "Green electricity investments: Environmental target and the optimal subsidy," European Journal of Operational Research, Elsevier, vol. 279(2), pages 635-644.
    2. Lavrutich, Maria & Hagspiel, Verena & Siddiqui, Afzal S., 2023. "Transmission investment under uncertainty: Reconciling private and public incentives," European Journal of Operational Research, Elsevier, vol. 304(3), pages 1167-1188.
    3. Nagy, Roel L.G. & Hagspiel, Verena & Kort, Peter M., 2021. "Green capacity investment under subsidy withdrawal risk," Energy Economics, Elsevier, vol. 98(C).
    4. Löschenbrand, Markus & Wei, Wei & Liu, Feng, 2018. "Hydro-thermal power market equilibrium with price-making hydropower producers," Energy, Elsevier, vol. 164(C), pages 377-389.

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