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This dissertation is at the crossroads of electricity markets, industrial organization
and real options literature. The main contribution of the dissertation
is to investigate the effects of market power when the strategic producers
own a portfolio of generation technologies and have ability to affect prices
while facing demand or production uncertainties.
The dissertation presents three chapters that deal with the short and long
term impacts of market power in the electricity markets. Specifically, the first
chapter provides a thorough look at the start up and shut down decisions of
the peakload generators and paves way to a better assessment of the extent
of the market power of a strategic firm. The second chapter shows the significance
of wind power generator ownership on the peakload firms production
decisions and market outcomes. Finally, the third chapter investigates how
the investment decisions and technology choice differ between fixed and flexible
production generators. Overall, this dissertation mainly adopts a real
options methodology where the optimal decisions of the producers have a
direct impact on the electricity prices contrary to the vast majority of the
real options literature.
The first chapter studies the effects of operational characteristics of power
plants on optimal dispatch decisions and estimation of market power. Specifically,
I give a real options model to show how operational characteristics of
power plants and market uncertainty affect start up and shut down decisions.
I show that in the case of ownership of multiple generation technologies, optimal
dispatch decisions cause capacity withholding for the peakload generator
in both the monopoly and the social planner cases. Moreover, the difference
between the start up trigger prices for the social planner and the marginal
cost reveals significant levels of real options premium. Overall, the existence
of significant real options premium levels shows that ignoring market uncertainties
and operational characteristics of individual generators, results
in overestimating the extent of market power of the firms in the industry.
Therefore, I conclude that real options analysis can be an asset for more
accurate investigations and decisions on the exercise of market power.
The second chapter shifts the focus to the ownership of wind generators as
the fixed baseload generation in the first chapter is assumed to be replaced
by the stochastic wind generation. Specifically, this chapter investigates the
short term effects of wind generator ownership by the owners of fossil-fueled peakload generators. I show that aggregate wind generator ownership reduces
the positive impact of the wind generation on the market outcomes
and as a result the total peakload production decreases and the market price
increases. Furthermore, when all wind generators are owned by the peakload
firms, the impact of wind generation on the market outcomes vanishes.
Additionally, start up and shut down (suspension) price thresholds are significantly
higher when the owner of peakload capacity also owns a share of
wind power generators. I also find that a feed-in premium support scheme
does not affect the peakload firms production levels and hence the market
outcomes. However, under a feed-in tariff type of support scheme, there is
an increase in the total production and a decrease in the market price.
The third chapter, coauthored with Rune Ramsdal Ernstsen, compares the
investment timing and the optimal level of investment for a hypothetical monopolist
and a social planner that have a one-time opportunity to invest in
a generator with either fixed or flexible production. It specifically investigates
how the investment triggers, optimal capacities and technology choices
change with the changes to the investment cost function, demand uncertainty
and the level of installed capacity in the market. The main contribution of
this paper is to document that the choice to invest between generators with
fixed or flexible production does not only depend on the differences in costs
for different technologies but also on the differences in operation of those
technologies.
We find that the strategic firm tends to invest at a higher demand trigger
level and lower capacity compared to the social planner for both the baseload
and the peakload investment cases. Hence, the strategic firm is expected to
invest at a later date while incurring lower investment costs. Furthermore,
for both the strategic firm and the social planner, fixed baseload generation
is preferable during low uncertainty cases whereas high uncertainty tends
to result in the choice of flexible peakload generation. We additionally find
that highly convex investment costs greatly diminishes the impact of market
power on the investment decisions. |
This work is licensed under a Creative Commons License.
