Endogenous Production Capacity Investment in Natural Gas Market Equilibrium Models

Abstract

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.