# Investment Incentives in Competitive Electricity Markets
## 1 Introduction
* A range of variable inter-dependency scenarios to emulate the uncertainties pertaining to non-strategic GENCOs is also addressed while the models in [31; 33; 34] do not have any uncertainty;
* The capacity payment policy as per the investment incentive is also considered where this offers a unique policy feature to inter-relate the investment incentive to the capacity payment while this policy has not been considered in papers [35; 36; 37; 38; 39; 16; 30; 33; 33; 16; 30; 31; 32; 33];
* The firm contract policy is also incorporated into the central design of investment incentive which focuses uniquely on the co-existence of an inter-relating investment incentive for the firm contract for a given capacity payment schedule while the firm contract has not been considered in [30; 31; 32; 33; 34; 16; 30; 31; 32; 33; 34; 16; 30; 34; 17; 18; 19; 20; 21; 22; 23; 24; 25; 26; 27; 28; 29; 30; 31; 32; 33; 34; 35; 36; 37; 38; 39]. * In this paper specifically, a unique pre-requisite for a new emerging concept of smart hybrid energy markets being central to smart energy generation and distribution, including both capacity payment and firm contract, is also encompassed in the proposed model under the simultaneous scenario existence of two independent investment incentives, being considered simultaneously. A conventional practice [30; 31; 32; 33; 34; 16; 30; 34; 37; 41; 42] to implement mathematical programming with equilibrium constraint (MPEC) framework model to evaluate power generation investment incentives exists. * In our case, we utilize and co-optimize the MPEC model for inter-relating the impact of both the firm contract and capacity payment on the global investment behaviour of electricity market structure. * Furthermore, in this context, the reliability indicators for different markets can also be monitored and compared concurrently with each other, as this approach offers a unique adaptability to apply this method to a range of power networks. * All demands in this paper are considered in two cases: elastic and inelastic, so that the price cap can be considered for strategic GENCO offers in market with inelastic demand. Some insight on the nature of market demands, such as elastic in [36; 37; 40; 41; 42], or as inelastic as in [18; 30; 31; 32; 33; 34; 37; 41] have also been compared. In this study, the effect of investment incentives and different electricity markets has been examined on a generation capacity expansion criterion, as from a strategic GENCO perspective under uncertainties in a single year horizon, which is eligible for the electricity market above, such as: the energy only (EO), capacity payments (CP), firm contract (FC) and smart hybrid (SH) markets. In particular, the hybrid category is the market subjected to unique importance that includes the investment incentives of combining a co-existing capacity payment as well as a firm contract. Therefore, this is specifically considered in this study. For this purpose of consideration, the investment criterion solution is modelled as a bi-level steps' optimization method, with the ease of expansion and adaptability to bi-level architectures, where the first and the second-level steps are related to investment problem (planning level) and operation problem (operation planning), respectively. The hierarchy of the method is divided into different levels. The first-level that includes decisions taken by a strategic GENCO who investigates installments of new generating unit in the future possible productions, in order to maximize the total profit in the planning horizon. In this criterion of markets, a strategic GENCO competes with non-strategic GENCOS (as rival GENCOs) both in investment and operation. The second-level models the above responses provided by a competitive fringe in terms of production bids, which are sorted by a market operator, who clears the market obtaining locational marginal prices (LMPs) as dual variables of the nodal balancing constraints.