The design of electricity markets in developing economies: A Differential Games and Optimal control methods application
Open Access
- Author:
- Matenga, Zvikomborero
- Graduate Program:
- Industrial Engineering
- Degree:
- Doctor of Philosophy
- Document Type:
- Dissertation
- Date of Defense:
- April 30, 2019
- Committee Members:
- Janis P Terpenny, Dissertation Advisor/Co-Advisor
Janis P Terpenny, Committee Chair/Co-Chair
Vinayak V Shanbhag, Committee Member
Qiushi Chen, Committee Member
Xingyuan Fang, Outside Member
Johannes Wolfgang Fedderke, Committee Chair/Co-Chair
Johannes Wolfgang Fedderke, Dissertation Advisor/Co-Advisor - Keywords:
- Electricity Markets
Developing Economies
Differential Games
Optimal Control Methods - Abstract:
- The design of an efficient electricity market for developing countries is a challenging task. The policy makers in these markets face challenges of poor investor interest, low consumer access, poor government structures, etc. There is also a need to meet global trends in reducing greenhouse emissions while improving electricity access and meeting social goals. These objectives can be conflicting especially in the early stages of development of green technologies for electricity generation. This dissertation is divided into four main sections; (1) the design of a privatized market structure with a serious entrant firm, (2) Optimal Taxing Strategy to Increase Competitiveness of Green Utility Supplier, and (3) Measuring the effects of competition and privatization in electricity Markets. The first study focuses on electricity markets in developing economies. Electricity utilities in developing economies face the challenge of increasing their network size while facing regulatory instruments like emission taxes in an underdeveloped network. The main challenge is the appropriate pricing strategy to implement to maximize long run profits for the incumbent. While for the entrant, there is a need to maximize long run profits and stay in the market. In addition, developing economies often have a monopolistic electricity market and low levels of electricity access. To address these challenges, this work identifies the pricing strategy for the utility players in a newly established competitive market. The pricing and network dynamics of a rational profit maximization entrant utility competing with a profit maximizing dominant incumbent is investigated. Each utility seeks to identify a pricing path that maximizes its long run profits. The analysis presented consist of nine distinct cases. Using optimal control theory, the problem is modeled as a dynamic differential game; in this case, a Nash differential game under the assumption that the market players simultaneously make pricing decisions. The variable of choice is the price while the network size is the outcome. The explicit equilibrium solution is obtained by solving a set of two second order differential equations for the Nash equilibrium. Both utilities adopt an increasing pricing path and the steady state network size depends on the price levels set by the competitor and the model parameters. The policy implication of these equilibrium solutions is also presented. The second study focuses on implementing a taxing strategy on the fossil fuel generator incumbent to improve the competitiveness of renewable energy utilities. The effects of climate change are starting to have an economic impact on developing economies. The heavy use of fossil fuels and the high investments costs required to utilize renewable energy sources in electricity generation exacerbates this problem by limiting entry of renewable energy sources. Unlike subsidies, implementing an optimal taxing policy on conventional energy sources can mitigate the competitive disadvantage of renewable source in terms without placing a steeper financial burden on the government. The main objective of this project is to determine an optimal taxing strategy that minimizes social costs due conventional energy sources and the optimal pricing strategies implemented by competing firms where the incumbent firm uses conventional energy sources and the entrant firm introduces renewable energy sources. The demands rates for both services does not only depend on the price levels but also on the consumers awareness of the environmental impacts due to conventional energy sources. This project shows that implementing an optimal taxing strategy raises the prices of fossil fuel energy therefore minimizing the pricing disadvantage that renewable energy utilities face. Using a three player Stackelberg differential game model where the policy maker is the leader and two competing utilities are the followers, an optimal pricing path and taxing policy are derived for the utility firms and the policy maker respectively. The final study focuses on quantitatively measuring the effects of introducing privatization and competition in electricity markets. The effects are measured through three performance measures which are price, urban access to electricity, rural access to electricity, and system losses. The data for this analysis comes from 15 Sub-Saharan African, 16 Latin American and Caribbean, 13 European, and 6 Middle East and North African countries for a period ranging from 1990 to 2015. Using fixed effects model, the results show that privatization has a positive correlation with access to electricity, while lack of competition has a negative correlation with access to electricity. This analysis also provides insights on policy changes that can be implemented to improve the performance of electric utilities. An emphasis on Sub-Saharan Africa and Latin America is made throughout the analysis as these regions are the least developed amongst the regions in this study and they show poor performance of utilities as measured by the three metrics used in this analysis.