Analysing the interactions between demand side and supply side investment decisions in an oligopolistic electricity market using a stochastic mixed complementarity problem

TL;DR

This paper models the complex interactions between demand and supply side investments in an oligopolistic electricity market using a novel stochastic mixed complementarity problem, revealing how market power influences investment and emissions.

Contribution

It introduces a new stochastic mixed complementarity model to analyze demand and supply investments in oligopolistic electricity markets, incorporating renewable uncertainties.

Findings

Price-making increases demand-side self-sufficiency investments.

Market power and self-sufficiency influence generation firms' decisions.

Absence of feed-in premiums boosts solar investments on the demand side.

Abstract

To meet carbon emission targets, governments around the world seek electricity consumers to invest in self-sufficiency technologies such as solar photovoltaic and battery storage. Such behaviour is sought in markets typically characterised by an oligopoly amongst generating firms. In this work, we study the interactions between investment decisions on the demand side and the supply side, and we investigate how price-making behaviour on the supply side affects these interactions compared to a situation with perfect competition. To do so, we introduce a novel stochastic mixed complementarity problem to model several players in an oligopolistic electricity market. On the supply side, we consider generating firms who make operational and investment decisions. On the demand side, we consider both industrial and residential consumers, each of whom may invest in self-sufficiency technologies. The uncertainties of wind and solar generation are the sources of the model's stochasticity. We apply the model to a case study of a stylised Irish electricity system in 2030. Our results demonstrate that price-making on the supply side increases investment in self-sufficiency on the demand side, leading to a reduction in prices and carbon emissions. We also find that both market power and self-sufficiency alter the investment and decommissioning decisions made by generation firms. Counter-intuitively, we also observe that the absence of a feed-in premium increases investment in solar generation on the demand side. Our findings highlight the importance of including both demand and supply side investment in models of electricity markets characterised by an oligopoly.