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Modeling the Impact of Market Interventions on the Strategic Evolution of Electricity Markets

Management Science and Operations, London Business School, Regent's Park, NW1 4SA, London, United Kingdom
Operational Management Department, ESSEC Business School, 95021 Cergy-Pontoise, France
dbunn{at}london.edu
oliveira{at}essec.fr

This paper presents a large-scale computationally intensive model for understanding the dynamic strategic evolution of electricity-generating asset portfolios in response to various market interventions, and the consequent longer-term effects of such changes on market structure and prices. We formulate a multistage model involving a Cournot representation of the wholesale electricity market, the performance of which then determines plant trading between players and the coevolution of market structure. An algorithm to model this game is presented. We apply this model to the full England and Wales system, as it was in 2000, and simulate the strategic responses to divestiture, capacity targets, and the two market mechanism variants of pool and bilateral market clearing.

Subject classifications: games/group decisions; noncooperative; government; energy policies; regulations; industries; electricity.
History: Received June 2004; revision received August 2007; accepted September 2007.