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Investment Incentives and Electricity Spot Market Competition

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  • Veronika Grimm
  • Gregor Zoettl

Abstract

In this paper we analyze investment decisions of strategic firms that anticipate competition on many consecutive spot markets with fluctuating (and possibly uncertain) demand. We study how the degree of spot market competition affects investment incentives and welfare and provide an application of the model to electricity market data. We show that more competitive spot market prices strictly decrease investment incentives of strategic firms. The effect can be severe enough to even offset the beneficial impact of more competitive spot markets on social welfare. Our results obtain with and without free entry. The analysis demonstrates that investment incentives necessarily have to be taken into account for a serious assessment of electricity spot market design.

Suggested Citation

  • Veronika Grimm & Gregor Zoettl, 2013. "Investment Incentives and Electricity Spot Market Competition," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 22(4), pages 832-851, December.
    • Handle: RePEc:bla:jemstr:v:22:y:2013:i:4:p:832-851
    DOI: 10.1111/jems.12029
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    References listed on IDEAS

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