Electricity capacity expansion in a Cournot duopoly

TY - GEN

T1 - Electricity capacity expansion in a Cournot duopoly

AU - Brondbo, Helene K.

AU - Storebo, Axel

AU - Fleten, Stein Erik

AU - Boomsma, Trine K.

PY - 2017/7/14

Y1 - 2017/7/14

N2 - This paper adopts a real options approach to analyze marginal investments in power markets with heterogeneous technologies and time-varying demand. We compare the investment behavior of two firms in a Cournot duopoly to a central planner's when two categories of power plants are available; base and peak load power plants. We find that producers exercise market power and the prices increase. Furthermore, the peak load plants become relatively more valuable and the share of installed peak load capacity exceeds the peak load share in a perfectly competitive market. In a numerical example, we show that this results in welfare losses above 10 %, and significantly larger reduction in the consumer surplus. Further, we examine the effect of analyzing power markets without time-varying demand and find that this underestimates investments in peak load capacity.

AB - This paper adopts a real options approach to analyze marginal investments in power markets with heterogeneous technologies and time-varying demand. We compare the investment behavior of two firms in a Cournot duopoly to a central planner's when two categories of power plants are available; base and peak load power plants. We find that producers exercise market power and the prices increase. Furthermore, the peak load plants become relatively more valuable and the share of installed peak load capacity exceeds the peak load share in a perfectly competitive market. In a numerical example, we show that this results in welfare losses above 10 %, and significantly larger reduction in the consumer surplus. Further, we examine the effect of analyzing power markets without time-varying demand and find that this underestimates investments in peak load capacity.

KW - Capacity expansion

KW - Duopoly

KW - Real options

KW - Social welfare

UR - http://www.scopus.com/inward/record.url?scp=85027140545&partnerID=8YFLogxK

U2 - 10.1109/eem.2017.7981928

DO - 10.1109/eem.2017.7981928

M3 - Article in proceedings

AN - SCOPUS:85027140545

BT - 2017 14th International Conference on the European Energy Market, EEM 2017

PB - IEEE Computer Society Press

T2 - 14th International Conference on the European Energy Market, EEM 2017

Y2 - 6 June 2017 through 9 June 2017

ER -