Valuation model for generation investment in an oligopoly electricity market

This paper proposes a new explicit approach for a generating company to evaluate investments in an oligopoly electricity market considering future expected investments from its competitors. The investment framework consists of two levels of investment problems. The upper problem consists of an optimization problem which models the expected future investments from all the companies in the market over the lifetime of the investment plant that the company is evaluating. A ´prototype´ of future investments and a retirement schedule are defined using dynamic programming. The lower problem corresponds to the profit evaluation of the new investment plant for each year against the ´prototype´ investment schedule obtained in the upper problem. The expected revenue of the new plant is calculated by clearing the market every year. In modeling an oligopoly market, we use a price duration curve from PJM market to estimate the bid prices of the generators. In the analysis, we consider a generating company evaluating investment in three different generation technologies i.e. nuclear, coal and combined cycle taking into account each technology´s investment risk profile.