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How capacity payments influence investment decisions in electricity markets

S. Wogrin, J. Barquín, E. Centeno

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).

12th Centre for Competition and Regulatory Policy Workshop - CCRP. París, France. 7-8 Julio 2011

Publicado: julio 2011.

    Líneas de investigación:
  • *Análisis de estrategia a largo plazo


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