Investment in renewable energy considering game theory and wind-hydro diversification

Abstract This paper explores the relationship among resource complementarity, diversification and strategic investment in a power market with two energy sources: water and wind. A review of diversification studies shows that the strategic aspects of investment, which arise from the oligopolistic structure of power markets, are often overlooked. Similarly, studies of strategic investment usually focus on price formation and do not analyze resource complementarity. This paper proposes an investment game with two players simultaneously installing new hydro or wind power generation capacity to satisfy demand in the same market. Individual payoffs depend on resource availability, and the equilibrium outcomes are evaluated for different wind-hydro correlations. The high negative correlation between resources increases diversification and investors’ payoffs. The results suggest that diversification has a strategic value for individuals and for the security of supply.