Market competition and strategic choices of electric power sources under fluctuating demand

Hiroaki Ino, Norimichi Matsueda and Toshihiro Matsumura

No 223, Discussion Paper Series from School of Economics, Kwansei Gakuin University

Abstract: This study investigates how the introduction of a competitor affects the behavior of an incumbent electricity producer who is a former local monopolist. We especially focus on its implications for the incumbent's capacity choice between two different electric power sources: one technology with a relatively high production cost (peak-load technology), which is represented by gas-fired power generation, and the other with a relatively high capacity-building cost (base-load technology), which is represented by nuclear power generation. We assume that the entrant does not have access to the latter technology and also that demand fluctuates over time, as is typically the case with an electricity market. Surprisingly, the introduction of a competitor increases the capacity of nuclear power generation if and only if the nuclear technology is sufficiently inefficient. This result also implies that the introduction of a competitor competition tends to decrease the nuclear capacity when the level of carbon tax, which tends to raise the relative production cost of gas-fired power generation, is sufficiently high.

Keywords: technology choice, carbon-free energy, carbon tax, deregulation, demand uncertainty, capacity commitment, imperfect competition (search for similar items in EconPapers)
JEL-codes: L13 L43 Q41 Q42 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2021-01
New Economics Papers: this item is included in nep-com, nep-ene, nep-ind and nep-reg
References: View references in EconPapers View complete reference list from CitEc
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http://192.218.163.163/RePEc/pdf/kgdp223.pdf First version, 2021 (application/pdf)

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Journal Article: Market competition and strategic choices of electric power sources under fluctuating demand (2022)
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