A Structural Estimation Analysis of the Strategic Switching of Peak Generators

Abstract

Maintaining reliability adequacy through a sufficient capacity buffer is of primary concern for electricity markets. The increased penetration of renewable electricity generation increases the already present need for maintaining flexible power generators in operation-ready states and to avoid temporary and permanent shutdowns. In this thesis I examine empirically how economic factors, government policy and strategic interactions affect thermal peak generators' decisions to switch between operating and stand-by states. I model the switching decisions using a structural model of a dynamic optimal decision game. I focus on the power markets in the Northeastern United States where annual observations of such switching decisions are available. The results indicate that regulatory uncertainty significantly increases firms' perception of switching costs, and that large power producers are noticeably more influenced by their economic environment during their decision-making than small firms.