Open versus closed loop capacity equilibria in electricity markets under perfect and oligopolistic competition - The case of asymmetric electricity generation firms

Abstract

In this paper we consider cost asymmetry of generation companies when comparing open and closed loop equilibrium models of the generation capacity expansion problem in liberalized electricity markets. We show that under certain assumptions on the cost data, previously established results [1] can be extended to asymmetric firms. In particular, we show that under certain cost assumptions, for one load period, for any choice of strategic spot market behavior ranging from perfect competition to Cournot, which we characterize by conjectural variations, and for asymmetric firms, the closed loop equilibrium coincides with the Cournot open loop equilibrium, thereby obtaining a 'Kreps and Scheinkman'-like result and extending it to arbitrary strategic behavior. We expand the model framework to multiple load periods, where the closed loop equilibria for different conjectural variations can diverge from each other and from open loop equilibria. Moreover, we find that even when firms are asymmetric, the rank ordering of the closed loop equilibria in terms of consumer surplus and market effciency (as measured by total social welfare) is ambiguous.