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Policy Uncertainty and Supply Adequacy in Electric Power Markets

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  • Gert Brunekreeft
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    Abstract

    This paper examines policy uncertainty adversely affecting investment in the electric power industry, covering generation and network assets. We focus on asymmetric, systematic, non-diversifiable risk with spin-offs. In generation, a key uncertainty is the inability of governments to refrain from intervention if capacity becomes scarce and prices rise. The policy expectations can, in fact, be self-fulfilling. One issue in network investment is that price-cap regulation is less suited to handling market risk than rate-of-return regulation. Another issue is the apparent inability of regulators credibly to commit to pre-announced policy. With increasing importance of new investment, a case can be made that (used-and-useful) rate-of-return regulation will regain territory in the future. Furthermore, improving checks and balances within the structure of regulation should be a focus of policy and good governance. Copyright 2005, Oxford University Press.

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    Bibliographic Info

    Article provided by Oxford University Press in its journal Oxford Review of Economic Policy.

    Volume (Year): 21 (2005)
    Issue (Month): 1 (Spring)
    Pages: 111-127

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    Handle: RePEc:oup:oxford:v:21:y:2005:i:1:p:111-127

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    Web page: http://oxrep.oupjournals.org/

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    Cited by:
    1. Roques, F.A., 2008. "Market Design for Generation Adequacy: Healing Causes rather than Symptoms," Cambridge Working Papers in Economics 0821, Faculty of Economics, University of Cambridge.

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