Strategic Behavior in Electricity Capacity Markets

This paper investigates the ways in which an electricity capacity market design may encourage generators to exaggerate their available capacity. For concrete analysis, a simple two-player discrete game model is introduced, focusing on two pure strategy Nash equilibria: an equilibrium at which generators offer their true capacities, and an equilibrium at which generators offer exaggerated capacities. Consideration of the current capacity market design leads us to conclude that the more conservative the independent system operator's capacity procurement, the higher the risk of exaggerated capacity offers. We also provide an extended continuous game model, and the analysis shows that when the ISO's capacity procurement is not conservative enough, the strategic generators will withhold their capacity offers, while, if the ISO's capacity procurement is too conservative, then the strategic generators will offer more than their true capacity. For illustration, a numerical example is presented.