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A Game theoretic model for generation capacity adequacy: Comparison between investment incentive mechanisms in electricity markets

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  • Haikel Khalfallah

    (EUI - European University Institute)

Abstract

n 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 marketbased mechanisms and increase consumers' payments.

Suggested Citation

  • Haikel Khalfallah, 2011. "A Game theoretic model for generation capacity adequacy: Comparison between investment incentive mechanisms in electricity markets," Post-Print halshs-00743195, HAL.
    • Handle: RePEc:hal:journl:halshs-00743195
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00743195
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    References listed on IDEAS

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    1. Pierre-Olivier Pineau & Pauli Murto, 2003. "An Oligopolistic Investment Model of the Finnish Electricity Market," Annals of Operations Research, Springer, vol. 121(1), pages 123-148, July.
    2. Harker, Patrick T., 1991. "Generalized Nash games and quasi-variational inequalities," European Journal of Operational Research, Elsevier, vol. 54(1), pages 81-94, September.
    3. Ford, Andrew, 1999. "Cycles in competitive electricity markets: a simulation study of the western United States," Energy Policy, Elsevier, vol. 27(11), pages 637-658, October.
    4. Frederic H. Murphy & Yves Smeers, 2005. "Generation Capacity Expansion in Imperfectly Competitive Restructured Electricity Markets," Operations Research, INFORMS, vol. 53(4), pages 646-661, August.
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    Cited by:

    1. repec:hal:wpaper:halshs-00816355 is not listed on IDEAS
    2. Cédric Clastres & Haikel Khalfallah, 2021. "Dynamic pricing efficiency with strategic retailers and consumers: An analytical analysis of short-term market interactions," Post-Print hal-03193212, HAL.
    3. Di Cosmo, Valeria & Lynch, Muireann Á., 2016. "Competition and the single electricity market: Which lessons for Ireland?," Utilities Policy, Elsevier, vol. 41(C), pages 40-47.
    4. Mastropietro, Paolo & Herrero, Ignacio & Rodilla, Pablo & Batlle, Carlos, 2016. "A model-based analysis on the impact of explicit penalty schemes in capacity mechanisms," Applied Energy, Elsevier, vol. 168(C), pages 406-417.
    5. Muireann A. Lynch and Mel T. Devine, 2017. "Investment vs. Refurbishment: Examining Capacity Payment Mechanisms Using Stochastic Mixed Complementarity Problems," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2).
    6. Devine, Mel T. & Lynch, Muireann Á., 2017. "Inducing truthful revelation of generator reliability," Energy Economics, Elsevier, vol. 64(C), pages 186-195.
    7. Haikel Khalfallah & Vincent Rious, 2013. "A game theoretical analysis of the design options of the real-time electricity market," Post-Print halshs-00816355, HAL.
    8. Rious, Vincent & Perez, Yannick & Roques, Fabien, 2015. "Which electricity market design to encourage the development of demand response?," Economic Analysis and Policy, Elsevier, vol. 48(C), pages 128-138.
    9. Lynch, Muireann Á. & Devine, Mel, 2015. "Investment vs. Refurbishment: Examining Capacity Payment Mechanisms Using Mixed Complementarity Problems With Endogenous Probability," Papers WP507, Economic and Social Research Institute (ESRI).
    10. 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.
    11. Cédric Clastres & Haikel Khalfallah, 2020. "Retailers' strategies facing demand response and markets interactions," Working Papers hal-03167543, HAL.

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    More about this item

    Keywords

    electricity market; adequacy; dynamic programming; complementarity problems; game theory; C6; C7; D5; D8; L1; Q4.;
    All these keywords.

    JEL classification:

    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • D5 - Microeconomics - - General Equilibrium and Disequilibrium
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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