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Optimal investment by large consumers in an electricity market with generator market power


Computational Management Science


Management Science and Operations

Authors / Editors

Verma P P;Hesamzadeh M R;Rebennack S;Bunn D;Swarup K S;Srinivasan D


Publication Year



The investment decisions of energy-intensive consumers can alter the balance of supply and demand in an electricity market, for example by amplifying the market power of incumbent generators such that prices may increase as a consequence. In particular, such investments in an existing market, which does not manifest substantial market power, may create a new potential for the exercise of market power by the generators. Whilst it is therefore intuitive that these investors will wish to consider their effects on the market, it is a challenging problem analytically. In general, the problem exists in any supply chain where demand-side investments influence endogenous price formation in the intermediate product markets. Theoretically, we show how the presence of producer market power decreases demand-side investments and then, computationally we formulate a quad-level program to model the operational implications for a demand-side investor in more detail. With an innovative reduction in complexity to a bilevel model, an efficient solution algorithm for the optimal investment by a demand-side investor is facilitated. We demonstrate computability on a small scale electricity system and the results confirm the theory.


Electricity market; Demand investment; Bayesian Nash equilibrium

Available on ECCH


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