A Stochastic Game Model Applied to the Nordic Electricity Market

Stein-Erik Fleten and Tek Tjing Lie
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Tek Tjing Lie: Department of Electrical & Electronic Engineering, Auckland University of Technology, New Zealand

Chapter 15 in Stochastic Programming:Applications in Finance, Energy, Planning and Logistics, 2013, pp 421-441 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractThe paper presents an investigation of market power potential in a deregulated hydro and thermal based electricity market through a two-stage stochastic Cournot model. The optimal hydro and forward strategies are examined when generation companies take into account the commitment effect of these decisions, i.e. the influence on the future play of opponents. The generation capacity of each company is regarded as given. In the first stage, firms decide on forward contracting, hydro and thermal generation (including nuclear) for the current spot market. In the second stage, they learn about water inflows to reservoirs before deciding on generation for the second stage spot market. Using cost and capacity data and historical inflow series from the Scandinavian market, large pure hydro producers are found to have little or no market power on the seasonal level, and that the largest producer, Vattenfall, has some incentive to withdraw capacity from the market. The simulated price in an oligopoly case is less than 7% higher than under perfect competition, thus the market is expected to be reasonably competitive. Still, competition authorities should monitor and possibly prevent market concentration to increase.

Keywords: Stochastic Programming; Optimization with Scenarios; Finance; Energy; Production and Logistics Applications (search for similar items in EconPapers)
Date: 2013
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