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Title:Endogenous investment decisions in natural gas equilibrium models with logarithmic cost functions PDF Logo
Authors:Huppmann, Daniel
Issue Date:2012
Series/Report no.:Discussion Papers, German Institute for Economic Research, DIW Berlin 1253
Abstract:The liberalisation of the natural gas markets and the importance of natural gas as a transition fuel to a low-carbon economy have led to the development of several large-scale equilibrium models in the last decade. These models combine long-term market equilibria and investments in infrastructure while accounting for market power by certain suppliers. They are widely used to simulate market outcomes given different scenarios of demand and supply development, environmental regulations and investment options. In order to capture the specific characteristics of natural gas production, most of these models apply a logarithmic production cost function. However, no model has so far combined this cost function type 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 paper provides a proof that combining endogenous investment decisions and a logarithmic cost function yields indeed a convex minimization problem, paving the way for an important extension of current state-of-the-art equilibrium models.
Subjects:natural gas
equilibrium model
endogenous investment
capacity expansion
logarithmic cost function
JEL:C61
Q41
L71
Document Type:Working Paper
Appears in Collections:Publikationen von Forscherinnen und Forschern des DIW
DIW-Diskussionspapiere

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