Capacity expansion games with application to competition in power generation investments

Aïd, René; Li, Liangchen; Ludkovski, Michael

doi:10.1016/j.jedc.2017.08.002

Cited by 8 publications

(20 citation statements)

References 26 publications

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“…We do not prove the convergence of the algorithm, however, in the illustrations presented in the next section we observe convergence of E C (ω (n) , η (n) ) and E R (ω (n) , η (n) ) to zero at the rate 1 n , thus the algorithm produces an ε-Nash equilibrium in O(ε −1 ) steps.…”

Section: 1mentioning

confidence: 74%

“…In particular, the near-zero marginal cost of electricity from renewable sources pushes down baseload wholesale electricity prices, eroding the profits of the conventional producers vital for system stability. As a result, baseload conventional producers leave the market 1 , and the peak demand has to be met to a larger extent by peakload plants with much higher generation costs. Paradoxically, the increased renewable penetration may therefore lead to higher peak prices and increased overall electricity procurement costs [31].…”

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confidence: 99%

“…The game theory has been applied to the modeling of entry/exit decisions of agents in electricity markets in [35], where a system of two producers is considered, and the price is not affected by the agents' decisions. A considerable literature is devoted to capacity expansion games in energy markets, see e.g., [1]. A related strand of literature uses computational agent-based models to understand the dynamics of wholesale electricity markets, see [37] for a review.…”

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confidence: 99%

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The entry and exit game in the electricity markets: A mean-field game approach

Aïd¹,

Dumitrescu²,

Tankov³

2021

JDG

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We develop a model for the industry dynamics in the electricity market, based on mean-field games of optimal stopping. In our model, there are two types of agents: the renewable producers and the conventional producers. The renewable producers choose the optimal moment to build new renewable plants, and the conventional producers choose the optimal moment to exit the market. The agents interact through the market price, determined by matching the aggregate supply of the two types of producers with an exogenous demand function. Using a relaxed formulation of optimal stopping mean-field games, we prove the existence of a Nash equilibrium and the uniqueness of the equilibrium price process. An empirical example, inspired by the UK electricity market is presented. The example shows that while renewable subsidies clearly lead to higher renewable penetration, this may entail a cost to the consumer in terms of higher peakload prices. In order to avoid rising prices, the renewable subsidies must be combined with mechanisms ensuring that sufficient conventional capacity remains in place to meet the energy demand during peak periods.2020 Mathematics Subject Classification. 91A55, 91A13, 91A80. Key words and phrases. Mean-field games, optimal stopping, renewable energy, electricity markets.Peter Tankov and René Aïd gratefully acknowledge financial support from the ANR (project EcoREES ANR-19-CE05-0042) and from the FIME Research Initiative.* Corresponding author.1 According to Reuters, the US coal electricity generation industry has been in steep decline for a decade due to competition from cheap and abundant gas and subsidized solar and wind energy, and 39,000 MW of coal-fired generation capacity was shut since 2017, see https://www.reuters.com/article/us-usa-coal-decline-graphic/ u-s-coal-fired-power-plants-closing-fast-despite-trumps-pledge-of-support-for-industry-idUSKBN1ZC15A

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Section: 1mentioning

confidence: 74%

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confidence: 99%

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confidence: 99%

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The entry and exit game in the electricity markets: A mean-field game approach

Aïd¹,

Dumitrescu²,

Tankov³

2021

JDG

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“…The above is a system of two coupled equations, which locally resembles an optimal stopping problem with running payoff π c (•), reward w ∓ (•) (last term), and stop-loss payoff (middle term) w ∓ (•) due to the producer impulse at τ . This is almost the formulation as considered in [3] except with two modifications:…”

Section: Consumer Best Responsementioning

confidence: 99%

“…• The boundary condition w + (x ) = w + (x + * ) is autonomous but non-local. Therefore, the two stopping-type VIs for the consumer are coupled only through the free boundaries, not through the stop-loss thresholds as in [3].…”

Section: Consumer Best Responsementioning

confidence: 99%

An Impulse-Regime Switching Game Model of Vertical Competition

Aïd

Campi

et al. 2021

Dyn Games Appl

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We study a new kind of nonzero-sum stochastic differential game with mixed impulse/switching controls, motivated by strategic competition in commodity markets. A representative upstream firm produces a commodity that is used by a representative downstream firm to produce a final consumption good. Both firms can influence the price of the commodity. By shutting down or increasing generation capacities, the upstream firm influences the price with impulses. By switching (or not) to a substitute, the downstream firm influences the drift of the commodity price process. We study the resulting impulse-regime switching game between the two firms, focusing on explicit threshold-type equilibria. Remarkably, this class of games naturally gives rise to multiple potential Nash equilibria, which we obtain thanks to a verification-based approach. We exhibit three candidate types of equilibria depending on the ultimate number of switches by the downstream firm (zero, one or an infinite number of switches). We illustrate the diversification effect provided by vertical integration in the specific case of the crude oil market. Our analysis shows that the diversification gains strongly depend on the pass-through from the crude price to the gasoline price.

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