Short-term market power assessment in a long-term dynamic modeling of capacity investment

This paper proposes a dynamic time simulation model for long-term generation capacity investment decisions in the presence of either perfect or imperfect electricity market. The model is based on system dynamics concept in which the dynamics of capacity construction is traced using the forecast of electricity price cleared in the short-term electricity market. Both the perfect and oligopolistic competitions are considered and a market power index is defined to evaluate the competition level of the electricity market. The short-term and long-term dynamic analysis are used to represent the generation firms´ behavior in bidding strategy and capacity investment, respectively. Both possibilities of using forward bilateral contracts and application of wind power generation have been assessed individually in the proposed model in order to mitigate the market power. The time simulation results derived from a case study demonstrate the effectiveness of the model in illustrating the oligopoly in electricity marketplace and also the alternative decisions to attenuate it. Such a decision tool enables both the generation firms and the regulators to gain perfect insight into the oligopoly and its consequences in the long-term capacity investment in the electricity market.