Simulation model to assess the performance of a forward capacity market for hydro-based systems

Faced with the need for additional generation resources to meet growing demand, many market designers point out the need for a mechanism to coordinate and incentive capacity investment. Several variations of capacity mechanisms have been proposed for this purpose. This study presents the theoretical basis of how concepts of a forward capacity market (FCM) can be applied for hydrothermal systems with significant portion of hydro generation, and a dynamic simulation model to assess the performance of an FCM under different levels of competitive conditions, ranging from monopoly to perfect competition. At each annual step of the simulation, the proposed model uses game theory to describe the strategic interdependence among the generators, which results in an optimisation problem that allows finding the total amount of new capacity to be added to the system. The solution of the game also takes into account the behaviour of entrant generators when faced with the uncertainties regarding demand growth and future water inflows. The main contribution of this study is to model the strategic behaviour of investors in generation. The proposed model is capable of reproducing classical economic results for complex cases such as asymmetric oligopoly, which considers uncertainty in the demand growth rate and risk averse players.