Generation capacity investment in oligopolistic electricity markets under uncertainty

Abstract

The paper discusses game theoretic models for generation capacity investment decisions in a deregulated electricity market. We present an example of an S-adapted Cournot equilibrium, which we apply to the German electricity market. Investment decisions derived by this dynamic oligopoly model are then compared to what the perfect competition result in an otherwise unchanged setup would be. We conclude that there seems to be a problem with underinvestment and technology mix in the current market structure. Possible remedies could be more competition or price caps which both mitigate the incentive to invest less to drive up prices.