Bargaining Power, Energy Security and Networks: an Applied Game Theory Approach

The realization of international energy distribution networks requires cooperation and the sharing of costs and benefits. Economic incentives, at a country level, to join an international network depend on how net surplus would be distributed, which in turn depends on a variety of factors: position of each country on a specific network, geo-political stability, existence of market distortions and avaiability of alternative energy sources (including renewables). This study is aimed at presenting a game theory methodology that can be applied to real world cases, thereby shedding light on several political economy issues.A methodology will be presented and illustrated with application to a fictious network structure. The method is based on a two-stage process: first, a network optimization model is used to generate payoff values under different coalitions and network structures; a second model is subsequently employed to identify cooperative game solutions, like the Shapley value or the nucleolus. Country level surplus and infrastructure costs can therefore be compared, to assess the economic viability of each project.A numerical model will be realized and discussed. The model output will be sensitive to assumptions on link capacity, supply and demand curves, possible existence of market distortions, alternative energy sources, geo-political stability.