Efficient capacity investment and joint production agreements in an oligopolistic electricity market: The HidroAysén Joint Venture Project

Abstract

We develop a model for a power market with the characteristics of the Chilean power supply industry, which is an integrated system with a system operator (SO) with a vast authority to define the dispatch of the system. We evaluate whether a large joint power generator project made up by the two largest power generators is an anti-competitive project. Considering four investment technologies for power generation, namely, hydro, coal, diesel, and an advantageous hydro technology which can only be built in a large scale (HidroAyse´ n) for the joint venture case, we use an oligopolistic Cournot model and a Benevolent Social Planner, both calibrated to the Chilean power industry, in order to assess the efficiency of alternative investment strategies and conditions whether the HidroAyse´n joint venture project can be barred to be judged as anti-competitive. Results suggest that the joint venture is an
efficient investment and there is a pro-competitive behaviour on the part of the two power generators, and that there are benefit to consumers, who should expect non-increasing energy prices as a result of the advantageous hydrotechnology.