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A Framework of Peak Load Pricing with Strategic Firms

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  • Gregor Zöttl

    (Department of Economics, University of Munich, Munich 80539, Germany)

Abstract

We analyze firms' investment incentives in markets where demand at spot markets is fluctuating and storability of the output is limited. Firms will then find it optimal to invest in a differentiated portfolio of technologies in order to serve fluctuating demand. For optimal behavior of firms, this has been analyzed in the so-called peak load pricing literature---cf. Crew and Kleindorfer [Crew, M., P. Kleindorfer. 1986. The Economics of Public Utility Regulation . MIT Press, Cambridge, MA]. We analyze the case of strategically behaved firms. We derive the equilibrium of the investment game and compare it to the benchmark case of optimal investment. We find that strategic firms have an incentive to overinvest in base load technologies but choose total capacities, which are too low from a welfare point of view.

Suggested Citation

  • Gregor Zöttl, 2010. "A Framework of Peak Load Pricing with Strategic Firms," Operations Research, INFORMS, vol. 58(6), pages 1637-1649, December.
    • Handle: RePEc:inm:oropre:v:58:y:2010:i:6:p:1637-1649
    DOI: 10.1287/opre.1100.0836
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    References listed on IDEAS

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    Cited by:

    1. S. Oliveira, Fernando & William-Rioux, Bertrand & Pierru, Axel, 2023. "Capacity expansion in liberalized electricity markets with locational pricing and renewable energy investments," Energy Economics, Elsevier, vol. 127(PB).
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    3. Bublitz, Andreas & Keles, Dogan & Zimmermann, Florian & Fraunholz, Christoph & Fichtner, Wolf, 2018. "A survey on electricity market design: Insights from theory and real-world implementations of capacity remuneration mechanisms," Working Paper Series in Production and Energy 27, Karlsruhe Institute of Technology (KIT), Institute for Industrial Production (IIP).

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