Endogenous production capacity investment in natural gas market equilibrium models

•The natural gas equilibrium model in Egging (2013) excludes endogenous production capacity expansion.•Investment in production capacity is added to the profit maximization problem of a supplier.•This yields a convex problem and can easily be included into state-of-the-literature equilibrium models....

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Bibliographic Details
Published in:European journal of operational research 2013-12, Vol.231 (2), p.503-506
Main Author: Huppmann, Daniel
Format: Article
Language:English
Subjects:
Accounting
Capacity expansion
Capital investments
Convex analysis
Decision making
Endogenous investment
Equilibrium
Equilibrium model
Financing
Investment
Logarithmic cost function
Markets
Natural gas
Natural gas industry
Production capacity
Regulations
Studies
Suppliers
Supply and demand
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Summary:•The natural gas equilibrium model in Egging (2013) excludes endogenous production capacity expansion.•Investment in production capacity is added to the profit maximization problem of a supplier.•This yields a convex problem and can easily be included into state-of-the-literature equilibrium models. The large-scale natural gas equilibrium model applied in Egging, 2013 combines long-term market equilibria and investments in infrastructure while accounting for market power by certain suppliers. Such models are widely used to simulate market outcomes given different scenarios of demand and supply development, environmental regulations and investment options in natural gas and other resource markets. However, no model has so far combined the logarithmic production cost function commonly used in natural gas models with endogenous investment decisions in production capacity. Given the importance of capacity constraints in the determination of the natural gas supply, this is a serious shortcoming of the current literature. This short note provides a proof that combining endogenous investment decisions and a logarithmic cost function yields a convex minimization problem, paving the way for an important extension of current state-of-the-art equilibrium models.
ISSN:0377-2217
1872-6860
DOI:10.1016/j.ejor.2013.05.048