The role of risk aversion and market completeness in gas and electricity investment coordination issues

Abstract

Given the increasing dominance of natural gas in the US electric power systems, the traditional concern of electricity regulators to ensure that market agents take efficient power plant investment decisions expands to pipelines in the gas system. Ensuring pipeline capacity, particularly when under tight supply conditions, involves entering into very long–term firm transportation contracts, and therefore introduces a major source of risk for generators. In this paper we analyze the problem of gas and electricity long-term planning coordination and the security of supply consequences, applied to New England. We assess how a risk-averse gas-fired generator owner underinvests in pipeline capacity when no hedging tools are available, and to what extent the gap could be bridged by adding long-term financial markets for risk. For this purpose, we formulate a market-equilibrium under four different settings solved by means of a Mixed Complementarity Problem.