Renewable Investment and Electricity Price Dynamics: A Mean Field Game Model

The growing penetration of renewable generation changes both producers’ marginal-cost and electricity-market price formation. This paper develops a mean field game model to examine how heterogeneous generators adjust marginal generation costs through renewable-oriented investment and how these decisions feed back into bid-stack clearing. Each generator controls the drift of its marginal cost, while the clearing price is determined by a demand-dependent quantile of the population cost distribution. The model leads to a coupled system with a non-local payoff. Simulations show that cost-reduction investment shifts the marginal-cost distribution toward lower-cost regions, but the widening distribution indicates heterogeneous effects. Generators below and close to the clearing margin have stronger incentives to reduce costs, whereas high-cost generators far above the margin face weaker incentives. These results suggest that market competition can support renewable-oriented cost reduction, but complementary policies may be needed for high-cost generators.