Market Power and Investment in Renewable Electricity Generation

In this paper, we compare the investment timing and the optimal level of investment for a strategic firm and a social planner that have a one-time opportunity to invest in different types of electricity generators. Different technology choices entail different revenue streams and hence a different approach to evaluate the investment decisions. In our paper we do not only focus on the differences in costs for different technologies but also on the differences in operation of those technologies and how those differences impact the optimal investment decisions. In our model, the one-time investment decision requires the determination of demand shock trigger level, choice of technology and level of optimal capacity. We specifically investigate 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. In the numerical results, 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 peakload investment cases. Hence, the strategic firm is expected to invest at a later date while incurring lower investment costs. We additionally find that highly convex investment cost greatly diminishes the impact of market power on the investment decisions. Furthermore, for both the strategic firm and the social planner, fixed baseload generation is preferable during low installed capacity and uncertainty cases whereas high uncertainty tends to result in the choice of flexible peakload generation.