12th Centre for Competition and Regulatory Policy Workshop - CCRP, Paris (France). 07-08 July 2011
Summary:
In this paper we analyze the impact that capacity payments have on long-term generation capacity investment decisions in liberalized electricity markets considering uncertainty in demand. In order to carry out such an analysis we formulate a bilevel model: in the upper level one generation company maximizes its total profits taking into account capacity payments while the lower level represents various demand scenarios of the oligopolistic market equilibrium via a conjectured price response formulation, which can capture various degrees of strategic
market behavior like perfect competition, the Cournot oligopoly and intermediate cases. This bilevel problem is formulated as a Mathematical Program with Equilibrium Constraints (MPEC).
We then apply diagonalization, a method where we iteratively solve each company’s MPEC while holding the competitors’ investments fixed which then yields an equilibrium solution.
Furthermore a study case is presented where we compare how different values of capacity payments influence the investment decisions.
Keywords: Generation expansion planning, bilevel programming, mathematical program with equilibrium constraints (MPEC).
Publication date: 2011-07-07.
Citation:
S. Wogrin, J. Barquín, E. Centeno, How capacity payments influence investment decisions in electricity markets, 12th Centre for Competition and Regulatory Policy Workshop - CCRP, Paris (France). 07-08 July 2011.
