Investment dynamics in electricity markets (Q623443)

The paper investigates the incentives for investment in capacity of energy generating firms acting in electricity markets with random demand growth. The problem is represented by a duopoly model. Each firm consists of some plants, and each trade period the firms participate in a uniform price auction that specifies the market price and the fraction of each firm's capacity that will be utilized. In the auction firms submit their price-bids which are limited from above by a price cap stipulated by the regulatory comission. In each period the firms can invest a part of their profits in new capacity. The process is considered as a dynamic game with Markovian property where the bidding and the investment strategies of the firms depend only on the current state (demand and firms' capacities) and incentives for collusion are not present. Analytical conditions providing existence and ``good properties'' (Markov perfect equilibrium) are represented by three theorems. Also the impact of ``price caps'' on consumer welfare is studied.