Option games applied for investment in power generation capacity

摘要

Due to significant economies of scale, the capital-intensive involved and government regulations that still don't rule a perfect competition environment, the power generation industry is usually organized as a market with oligopolistic competition. In this type of market structure, participating agents implement different strategies or games to exercise market power in order to increase their profits above competitive levels or prevent the entry of new agents to the market. This kind of problem is usually described by a Game Theory (GT) approach. Furthermore, the investor must evaluate the investment alternatives (add generation units) taking into account the flexibility of the investment options, in order to face unfavorable market scenarios, including the strategic movements of its competitors. This kind of problem is usually described by a Real Option (RO) approach. Therefore, it has been highlighted the necessity of developing a hybrid tool that combines the methods of GT and RO in order to fully face those inconveniences in the power generation problem mentioned. This evaluation tool, called Options Games has been developed recently. Despite its enormous potential, this new methodology has not received significant attention yet in the field of power generation. This paper presents an application of the Options Games approach in order to describe the challenge of investment in power generation capacity in a duopoly market.