Electricity capacity expansion in a Cournot duopoly
Research output: Chapter in Book/Report/Conference proceeding › Article in proceedings › Research › peer-review
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Electricity capacity expansion in a Cournot duopoly. / Brondbo, Helene K.; Storebo, Axel; Fleten, Stein Erik; Boomsma, Trine K.
2017 14th International Conference on the European Energy Market, EEM 2017. IEEE Computer Society Press, 2017. 7981928.Research output: Chapter in Book/Report/Conference proceeding › Article in proceedings › Research › peer-review
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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 -
ID: 186087983