Representation of electricity generation capacity expansion by means of game theory models

Abstract

Electricity generation capacity expansion is still a complex and elusive problem. Nevertheless, the importance for generation companies and regulators of analyzing the decision of building new power plants, due to its economic impact, has led to a large number of studies that address this problem using different techniques. One of the most promising alternatives is the use of game theory. This paper presents two game theory models that can be used in this context and compares them. The first model is an extension of a conjectured-price-response market equilibrium model that includes expansion decisions. In this case, each agent optimizes in a singleshot game the overall profit including investment and operation. The second model considers expansion and operation decisions separately to increase model realism. In this model expansion level considers overall profit, but market is considered as a constraint for the upper level game, in a bilevel game schema. Some bilevel games can be reduced to a one-stage conjectured-price-response game. Thus, the objective of the paper is to assess if the one shot game, that is much easier to solve can be considered as a good approximation for the bilevel game formulation, without explicitly solving the bilevel game.