How capacity payments influence investment decisions in electricity markets

Sonja Wogrin, Julián Barquín, Efraim Centeno

Research output: Contribution to conferenceAbstractpeer-review


In this paper we analyze the impact that capacity payments have on long-term generation capacity investment decisions in liberalized electricity markets considering uncertainty in demand. In order to carry out such an analysis we formulate a bilevel model: in the upper level one generation company maximizes its total profits taking into account capacity payments while the lower level represents various demand scenarios of the oligopolistic market equilibrium via a conjectured price response formulation, which can capture various degrees of strategic market behavior like perfect competition, the Cournot oligopoly and intermediate cases. This bilevel problem is formulated as a Mathematical Program with Equilibrium Constraints (MPEC). We then apply diagonalization, a method where we iteratively solve each company’s MPEC while holding the competitors’ investments fixed which then yields an equilibrium solution. Furthermore a study case is presented where we compare how different values of capacity payments influence the investment decisions.
Original languageEnglish
Publication statusPublished - 2011
Externally publishedYes
Event12th Centre for Competition and Regulatory Policy Workshop - CCRP - Paris, France
Duration: 7 Jul 20118 Jul 2011


Conference12th Centre for Competition and Regulatory Policy Workshop - CCRP

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