An Oligopolistic Investment Model of the Finnish Electricity Market

Authors: Pineau P-O.¹; Murto P.²

Source: Annals of Operations Research, Volume 121, Numbers 1-4, July 2003 , pp. 123-148(26)

Publisher: Springer

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Abstract:

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.

Keywords: investment; oligopoly; uncertainty; dynamic games; S-adapted equilibrium; electricity markets

Language: English

Document Type: Research article

Affiliations: 1: School of Public Administration, University of Victoria, Canada ppineau@uvic.ca 2: Systems Analysis Laboratory, Helsinki University of Technology, Finland

Publication date: 2003-07-01