A mixed integer nonlinear program for electric generation expansion with energy and capacity pricing

This paper proposes a new mechanism to give added incentive to invest in new capacities in deregulated electricity markets. An optimization problem to maximize long term social welfare includes binary variables for the building of new facilities, and continuous variables for generation, i.e. the model is a mixed integer nonlinear program. The new mechanism also includes a new approach to calculate capacity prices in addition to the commodity prices: an auxiliary mathematical program calculates the minimum capacity price that is necessary to ensure that all firms investing in new capacities are satisfied with their profit levels.