Generation Capacity Expansion in Restructured Power Markets under a CO2 Cap-and-Trade Program

Determining the location, timing, and type of generation capacity to build in order to satisfy an increasing electricity demand presents a challenge to the generators. The implementation of a CO2 cap-and-trade program significantly compounds this challenge. The generators will have to consider the limits and costs of emissions as well as a broader array of generation technologies. In this paper, we develop a game-theoretic model that will allow generators to evaluate capacity expansion plans under dierent CO2 cap-andtrade scenarios. Our focus is on restructured power markets, where capacity expansion is driven by market competition as opposed to being coordinated by the system operators (as in regulated markets). The model is implemented on a sample power network created from the electricity market data of northern Illinois in the U.S. The sample network is assumed to operate under a CO2 cap-and-trade program modeled similar to