Frederic Murphy (Temple University) & David Wogan (Asia Pacific Energy Research Center): How to Model Price Controls Using Mixed-Complementarity Models

Linear programs require marginal cost pricing and regulated prices cannot be modeled, without introducing algorithms for solving sets of equations. With robust algorithms for solving mixed complementarity problems, it is now possible to model pricing regulations directly in MCP’s. In this talk we provide formulations for when markets can clear despite price controls and when shortages occur. We also explain how to incorporate such pricing regimes as average-cost pricing. We have used these techniques to analyze policy alternatives as part of Saudi Arabia’s restructuring of its domestic energy policies. We illustrate our approach with a study on improving the costs of electricity generation through a better utilization of the Gulf Coordinating Council Interconnector.