A game-theoretical model of private power production

Abstract

Private power production has sprung up all over the world. The build–operate–transfer (BOT) arrangement has emerged as one of the most important options for private power production, especially in developing countries with rapidly growing demand and financial shortages. Based on oligopoly theory, the paper proposes a Stackelberg game model between a BOT investor and an electric utility whereby they can negotiate a long-term energy contract. Asymmetric pricing schemes are taken into account such that a host utility purchases electricity from a BOT company at its “avoided cost”, and sells its electricity to end users at its “average cost”. Our Stackelberg game model is transferred into a two-level optimization problem, and then solved by an iterative algorithm. The game model is demonstrated by an illustrative example.