Playing Pollution Games with Thermal Electricity Generators

This paper discusses the economic and environmental implications of a stylised electricity market with transmission grid constraints and shared temporal pollution standards that restrict the joint strategy space of the agents. These are problematic to enforce if individual monitoring is impossible or very expensive. For such situations, we propose a time-dependent (or “open-loop dynamic”), game-theoretic model capable of analysing coupled constraints equilibria, also known as generalised Nash. We compute these equilibria for thermal generators subjected to annual pollution limits and instantaneous grid restrictions for a three-node dc model with a two-period load duration curve. The model illustrates the possibility that well-meaning environmental regulation might harm consumer surplus. It also highlights the cost to efficiency of regulatory attempts to ease the burden of compliance.