An Oligopolistic Investment Model of the Finnish Electricity Market

The investment problem faced by producers in deregulated electricity markets contains high uncertainties about the future. It can also be seen as a game, as only a small number of large players act in the market. A dynamic stochastic oligopoly model to describe the production and investment in such a situation is developed and applied to the Finnish electricity market. The demand growth rate is modeled as a stochastic variable. The strategies of the firms consist of investments and production levels for base and peak load periods. The firms have nuclear, hydro and thermal capacities, but are only allowed to invest in new thermal capacity. Using a so-called sample-path adapted open-loop information structure, the model contributes to the understanding of the dynamics of production, investment and market power in a medium time horizon. The solution method uses recent developments in variational inequality and mixed complementarity problem formulations.

[1]  M. Elkhafif.  Estimating Disaggregated Price Elasticities in Industrial Energy Demand , 1992 .

[2]  B. Hobbs,et al.  Using game theory to analyze electric transmission pricing policies in the United States , 1992 .

[3]  Lars Bergman,et al.  Market Structure and the Price of Electricity: An Ex Ante Analysis of the Deregulated Swedish Electricity Market , 1995 .

[4]  Friedel Bolle,et al.  Supply function equilibria and the danger of tacit collusion: The case of spot markets for electricity , 1992 .

[5]  Jong-Shi Pang,et al.  Iterative methods for variational and complementarity problems , 1982, Math. Program..

[6]  John N. Tsitsiklis,et al.  Parallel and distributed computation , 1989 .

[7]  Pierre-Olivier Pineau,et al.  A perspective on the restructuring of the Finnish electricity market , 2000 .

[8]  J. Friedman.  Game theory with applications to economics , 1986 .

[9]  James Bushnell,et al.  Market Power in Electricity Markets: Beyond Concentration Measures , 1999 .

[10]  S. M. Shahidehpour,et al.  Electricity Supply Industry , 1999 .

[11]  Stephen W. Salant,et al.  Imperfect Competition in the International Energy Market: A Computerized Nash-Cournot Model , 1982, Oper. Res..

[12]  Paul Ekins,et al.  Global warming and energy demand , 1995 .

[13]  E. Kahn,et al.  International comparisons of electricity regulation , 1996 .

[14]  P. Klemperer,et al.  Supply Function Equilibria in Oligopoly under Uncertainty , 1989 .

[15]  Ole Jess Olsen.  Competition in the electricity supply industry : experience from Europe and the United States , 1995 .

[16]  T. Rutherford.  MILES: A Mixed Inequality and nonLinear Equation Solver , 1993 .

[17]  Carl Davidson,et al.  Long-Run Competition in Capacity, Short-Run Competition in Price, and the Cournot Model , 1986 .

[18]  Y. Smeers,et al.  A stochastic version of a Stackelberg-Nash-Cournot equilibrium model , 1997 .

[19]  Michael Hoel,et al.  Natural Gas Markets and Contracts , 1987 .

[20]  David M. Kreps,et al.  Quantity Precommitment and Bertrand Competition Yield Cournot Outcomes , 1983 .

[21]  Y. Smeers,et al.  Stochastic equilibrium programming for dynamic oligopolistic markets , 1987 .

[22]  Bo Andersson,et al.  Power production and the price of electricity: an analysis of a phase-out of Swedish nuclear power , 1997 .

[23]  D. Kinderlehrer,et al.  An introduction to variational inequalities and their applications , 1980 .

[24]  A. Nagurney,et al.  Oligopolistic and competitive behavior of spatially separated markets , 1987 .

[25]  Amit Kanudia,et al.  Robust responses to climate change via stochastic MARKAL: The case of Québec , 1996, Eur. J. Oper. Res..

[26]  Patrick T. Harker,et al.  Finite-dimensional variational inequality and nonlinear complementarity problems: A survey of theory, algorithms and applications , 1990, Math. Program..

[27]  Jan Bentzen,et al.  Short- and long-run elasticities in energy demand: A cointegration approach , 1993 .

[28]  R. Green,et al.  Increasing Competition in the British Electricity Spot Market , 1996 .

[29]  Benjamin F. Hobbs,et al.  Network Models of Spatial Oligopoly with an Application to Deregulation of Electricity Generation , 1986, Oper. Res..

[30]  N. M. Fehr,et al.  SPOT MARKET COMPETITION IN THE UK ELECTRICITY INDUSTRY , 1993 .

[31]  Yves Smeers,et al.  Computable Equilibrium Models and the Restructuring of the European Electricity and Gas Markets , 1997 .

[32]  Hanif D. Sherali,et al.  A mathematical programming approach for determining oligopolistic market equilibrium , 1982, Math. Program..

[33]  Georges Zaccour.  Deregulation of Electric Utilities , 1998 .

[34]  Anna Nagurney,et al.  Algorithms for oligopolistic market equilibrium problems , 1988 .

[35]  R. Green,et al.  Competition in the British Electricity Spot Market , 1992, Journal of Political Economy.

[36]  Patrice Marcotte.  Quelques notes et résultats nouveaux sur le problème d'équilibre d'un oligopole , 1984 .

[37]  Patrick T. Harker,et al.  A variational inequality approach for the determination of oligopolistic market equilibrium , 1984, Math. Program..

[38]  A. Nagurney.  Network Economics: A Variational Inequality Approach , 1992 .

[39]  Denis Bolduc,et al.  Quebec residential electricity demand: a microeconometric approach , 1996 .

[40]  James W. Friedman,et al.  Oligopoly and the theory of games , 1977 .

[41]  M. Ivimey.  Annual report , 1958, IRE Transactions on Engineering Writing and Speech.