Table of Contents
Acknowledgments v
1 Introduction 1
1.1 The war of liberalization . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Strategy and strategic behavior . . . . . . . . . . . . . . . . . . . . . . . . 3
1.3 Aim and approach of the research . . . . . . . . . . . . . . . . . . . . . . 6
1.4 Scope of the research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
1.5 Overview of this thesis . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2 Liberalization in electricity sectors 11
2.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.2 Concepts of liberalization: Deregulation, reregulation, privatization, corporatization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.3 Liberalization in public sector and networked infrastructures . . . . . . . . 14
2.4 Drivers of liberalization in Europe . . . . . . . . . . . . . . . . . . . . . . 15
2.5 Electricity sector before the reform . . . . . . . . . . . . . . . . . . . . . . 17
2.6 Electricity sector after the reform . . . . . . . . . . . . . . . . . . . . . . . 18
2.7 Market power in electricity markets . . . . . . . . . . . . . . . . . . . . . 20
2.8 Strategy-prone complexities of electricity markets . . . . . . . . . . . . . . 23
2.9 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
3 Research Methodology 27
3.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
3.2 Systems thinking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
3.2.1 Operations research, optimization and linear programming . . . . . 28
3.2.2 Policy analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
3.2.3 Multi-actor systems and actor analysis . . . . . . . . . . . . . . . . 31
3.3 Formal modeling as an inquiry method . . . . . . . . . . . . . . . . . . . . 32
3.4 Game theoretical formal modeling . . . . . . . . . . . . . . . . . . . . . . 33
3.4.1 Game theory in the context of policy analysis . . . . . . . . . . . . 34
3.4.2 Positioning game theory in electricity market modeling . . . . . . . 35
3.4.3 Suitability and limitations of game theory in this research . . . . . . 37
3.5 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
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viii Contents
4 Research Design 41
4.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
4.2 Game theoretical formal modeling in electricity sectors: Exemplifying theory 41
4.3 Cases and thought experiments: game theoretical formal modeling in action 42
4.4 Modeling cycle and policy argumentation . . . . . . . . . . . . . . . . . . 43
4.4.1 Observation and actor analysis . . . . . . . . . . . . . . . . . . . . 44
4.4.2 Conceptualization and model specification . . . . . . . . . . . . . 45
4.4.3 Modeling and testing . . . . . . . . . . . . . . . . . . . . . . . . . 45
4.4.4 Policy implications . . . . . . . . . . . . . . . . . . . . . . . . . . 46
4.5 Policy synthesis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
4.6 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
5 Load-Shifting Price Incentives in Retail Markets 49
5.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
5.2 The electricity retail market and load-shifting price incentives . . . . . . . . 49
5.3 Model conceptualization . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
5.4 Player descriptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
5.4.1 Consumers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
5.4.2 Producer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
5.4.3 Retailer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
5.5 Decision model: The monopoly case . . . . . . . . . . . . . . . . . . . . . 61
5.6 Duopoly game . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
5.6.1 Producer and consumers . . . . . . . . . . . . . . . . . . . . . . . 64
5.6.2 Retailers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
5.6.3 Nash equilibrium . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
5.6.4 Repeated duopoly game . . . . . . . . . . . . . . . . . . . . . . . 68
5.7 Oligopoly game . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
5.8 Conclusions and policy implications . . . . . . . . . . . . . . . . . . . . . 70
6 Financial Transmission Rights 73
6.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
6.2 Transmission Congestion Management . . . . . . . . . . . . . . . . . . . . 73
6.2.1 State-owned and centrally regulated policies . . . . . . . . . . . . . 75
6.2.2 Transmission rights . . . . . . . . . . . . . . . . . . . . . . . . . . 77
6.3 Physical transmission rights . . . . . . . . . . . . . . . . . . . . . . . . . 77
6.3.1 Explicit auction . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
6.3.2 Implicit auction . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
6.3.3 Market splitting . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
6.4 Financial transmission rights . . . . . . . . . . . . . . . . . . . . . . . . . 79
6.4.1 Locational marginal pricing and financial transmission rights . . . . 79
6.4.2 An illustrative example . . . . . . . . . . . . . . . . . . . . . . . 80
6.4.3 Obligations and option FTRs . . . . . . . . . . . . . . . . . . . . . 83
6.5 Coupled electricity-FTR market model . . . . . . . . . . . . . . . . . . . . 84
6.5.1 Electricity market . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
6.5.2 The FTR market . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
6.5.3 Numerical example . . . . . . . . . . . . . . . . . . . . . . . . . . 94
Contents ix
6.6 Conclusions and policy implications . . . . . . . . . . . . . . . . . . . . . 101
7 Technology Innovation in Liberalized Electricity Sectors 103
7.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103
7.1.1 The nature of the problem and its consequences . . . . . . . . . . 104
7.1.2 Evidence for limited innovation in the sector . . . . . . . . . . . . 106
7.1.3 Characteristics of electricity sectors in relation to innovation . . . . 107
7.1.4 Formal models of innovation processes . . . . . . . . . . . . . . . 109
7.2 Game theoretical models of electricity innovation . . . . . . . . . . . . . . 109
7.3 Generation technology innovation game . . . . . . . . . . . . . . . . . . . 114
7.3.1 Part I: Generator – equipment vendor game . . . . . . . . . . . . . 115
7.3.2 General equilibrium model of the wholesale competition . . . . . . 116
7.3.3 Generator (Gen) and equipment vendor (EV) payoffs . . . . . . . . 118
7.3.4 Game in strategic form . . . . . . . . . . . . . . . . . . . . . . . . 119
7.3.5 Solution of the generator-equipment vendor game . . . . . . . . . . 120
7.3.6 Part II: Generator duopoly game . . . . . . . . . . . . . . . . . . . 122
7.3.7 Generator payoffs . . . . . . . . . . . . . . . . . . . . . . . . . . . 123
7.3.8 Solution of the generator duopoly game . . . . . . . . . . . . . . . 127
7.4 Conclusions and policy implications . . . . . . . . . . . . . . . . . . . . . 129
8 Policy Synthesis and Reflections 133
8.1 Policy synthesis and reflections on policymaking . . . . . . . . . . . . . . 134
8.1.1 Strategic behavior as a concern for policymakers . . . . . . . . . . 134
8.1.2 The policy relevance of the load-shifting problem . . . . . . . . . . 135
8.1.3 The policy relevance of the congestion management problem and
the financial transmission rights case . . . . . . . . . . . . . . . . . 136
8.1.4 The policy relevance of innovation in electricity sectors . . . . . . . 139
8.2 Reflections on the methodology . . . . . . . . . . . . . . . . . . . . . . . 140
8.2.1 Actionability, generalizability and limitations of game theoretical
formal models . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140
8.2.2 Modeling complexities: Stylized models vs large-scale models . . . 142
9 Conclusions 143
9.1 Conclusions of the cases . . . . . . . . . . . . . . . . . . . . . . . . . . . 143
9.2 Answers to the research questions and revisiting the objectives of the study 145
9.3 Limitations of the study . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147
9.4 Future research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149
A Complementarity problems as an engineering systems design framework 151
A.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151
A.2 Formulation of the problem . . . . . . . . . . . . . . . . . . . . . . . . . . 152
A.2.1 Basic formulation . . . . . . . . . . . . . . . . . . . . . . . . . . . 152
A.2.2 Origin in duality theory . . . . . . . . . . . . . . . . . . . . . . . . 153
A.2.3 Parts of the LCP problem . . . . . . . . . . . . . . . . . . . . . . . 153
A.2.4 Actor and game formulation . . . . . . . . . . . . . . . . . . . . . 154
A.3 Illustrative example . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156
x Contents
A.3.1 Problem formulation . . . . . . . . . . . . . . . . . . . . . . . . . 156
A.3.2 Complementarity formulation . . . . . . . . . . . . . . . . . . . . 157
A.3.3 Basic problem results . . . . . . . . . . . . . . . . . . . . . . . . . 158
A.3.4 Game formulation . . . . . . . . . . . . . . . . . . . . . . . . . . 159
A.3.5 Game equilibrium results . . . . . . . . . . . . . . . . . . . . . . . 159
B Appendix B: Load Shifting Price Incentives MATLAB Implementation 161
C Appendix C: Financial Transmission Rights MATLAB Implementation 167
List of Abbreviations 193
Summary 195
Samenvatting 201
Dissemination 207
Curriculum vitae 209
NGInfra PhD Thesis Series on Infrastructures 211
Abstract
The electricity infrastructure, like many other networked infrastructures, is an indispensable and integral part of developed economies. The economic growth, quality of life and general well-being of modern societies all depend on the smooth, reliable and efficient operation of electricity system. On the other hand, adverse strategic behavior by the newly emerged actors in liberalized electricity sectors poses a threat to seamless operation of electricity system. Analyzing strategic behavior is not a straightforward call, even with regard to the non-networked infrastructures. Adding network complexity and the peculiarities of electricity make it even more difficult to analyze strategic behavior. The analysis has to be done with tailored methods that take into account the peculiarities of the underlying system. This study proposes game theoretical formal modeling approach as a way to analyze strategic behavior in liberalized electricity sectors. Three cases that exemplify strategic behavior in liberalized electricity sectors are chosen to be analyzed. For each case, a context of the strategic problem is provided and a game theoretical formal model is created in order to quantitatively conceptualize and represent the strategic problem. The outcomes offer valuable insights into strategic behavior in liberalized electricity sectors and demonstrate the need for ongoing analysis in this domain. This dissertation is the result of Sertaç Oruç’s PhD research at the faculty of Technology, Policy and Management at Delft University of Technology in the Netherlands.
