Generation Capacity Expansion in Electricity Markets under Rivalry and Uncertainty

Due to exposure to uncertainty created by the deregulation of electricity industries worldwide and the need to respond to climate change via investment in more sustainable technologies, the challenges and opportunities facing power companies have increased over the past decade. Consequently, the electric power sector requires decision support that is more responsive to market conditions, while policymakers seek insights about the consequences of uncertainty on investment outcomes. We propose to extend the traditional real options approach to electricity capacity expansion by investigating game-theoretic issues emerging from the competition between agents, each with a portfolio of electricity production technologies. Such a framework will take into account not only the feedback effect of capacity expansion on the price of electricity and the dependence of the value of a generation unit on the presence of others (Gahungu and Smeers, 2011) but also the strategic aspects of capacity expansion in a quasi-analytical framework.