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Capacity expansion and forward contracting in a duopolistic power sector
Stockholm University, Faculty of Social Sciences, Department of Computer and Systems Sciences. University College London, UK .
2014 (English)In: Computational Management Science, ISSN 1619-697X, Vol. 11, no 1-2, 57-86 p.Article in journal (Refereed) Published
Abstract [en]

The surge in demand for electricity in recent years requires that power companies expand generation capacity sufficiently. Yet, at the same time, energy demand is subject to seasonal variations and peak-hour factors that cause it to be extremely volatile and unpredictable, thereby complicating the decision-making process. We investigate how power companies can optimise their capacity-expansion decisions while facing uncertainty and examine how expansion and forward contracts can be used as suitable tools for hedging against risk under market power. The problem is solved through a mixed-complementarity approach. Scenario-specific numerical results are analysed, and conclusions are drawn on how risk aversion, competition, and uncertainty interact in hedging, generation, and expansion decisions of a power company. We find that forward markets not only provide an effective means of risk hedging but also improve market efficiency with higher power output and lower prices. Power producers with higher levels of risk aversion tend to engage less in capacity expansion with the result that together with the option to sell in forward markets, very risk-averse producers generate at a level that hardly varies with scenarios.

Place, publisher, year, edition, pages
2014. Vol. 11, no 1-2, 57-86 p.
Keyword [en]
Stochastic programming, Complementarity modelling, Energy markets, Risk management, Capacity expansion
National Category
Information Systems
Research subject
Computer and Systems Sciences
URN: urn:nbn:se:su:diva-97713DOI: 10.1007/s10287-013-0166-6OAI: diva2:679943
Available from: 2013-12-17 Created: 2013-12-17 Last updated: 2014-02-06Bibliographically approved

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Siddiqui, Afzal
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