This Article Full Text (PDF) References Alert me when this article is cited Alert me if a correction is posted Services Email this article to a friend Similar articles in this journal Alert me to new issues of the journal Download to citation manager Citing Articles Citing Articles via Google Scholar Google Scholar Articles by Murphy, F. H. Articles by Smeers, Y. Search for Related Content

Generation Capacity Expansion in Imperfectly Competitive Restructured Electricity Markets

Fox School of Business and Management, Temple University, Philadelphia, Pennsylvania 19122
Department of Mathematical Engineering and Center for Operations Research and Econometrics, Université Catholique de Louvain, Voie du Roman Pays 34, 1348 Louvain-la-Neuve, Belgium
fmurphy{at}temple.edu
smeers{at}core.ucl.ac.be

We consider three models of investments in generation capacity in restructured electricity systems that differ with respect to their underlying economic assumptions. The first model assumes a perfect, competitive equilibrium. It is very similar to the traditional capacity expansion models even if its economic interpretation is different. The second model (open-loop Cournot game) extends the Cournot model to include investments in new generation capacities. This model can be interpreted as describing investments in an oligopolistic market where capacity is simultaneously built and sold in long-term contracts when there is no spot market. The third model (closed-loop Cournot game) separates the investment and sales decision with investment in the first stage and sales in the second stage—that is, a spot market. This two-stage game corresponds to investments in merchant plants where the first-stage equilibrium problem is solved subject to equilibrium constraints. We show that despite some important differences, the open- and closed-loop games share many properties. One of the important results is that the prices and quantities produced in the closed-loop game, when the solution exists, fall between the prices and quantities in the open-loop game and the competitive equilibrium.

Subject classifications: electric utilities; existence and characterization of equilibria; noncooperative games; programming; oligopolistic models.
History: Received June 2001; revision received June 2002; revision received March 2003; revision received March 2004; accepted April 2004.