How Options Provided by Storage Affect Electricity Prices
AbstractGenerators supplying electricity markets are subject to volatile input and output prices and uncertain fuel availability. We show that a price-taking generator will generate only when the output price exceeds its operational marginal cost by the value of the option to delay the use of stored fuel. This option value, which is an increasing function of spot price volatility and the uncertainty about fuel availability, must be considered when evaluating whether market power is present in electricity markets. We calibrate our model to the California electricity market and show the implications of Hurricane Katrina for generators’ offers. The standard approach for simulating electricity supply curves for use in market power evaluations just uses operational marginal cost. Our work demonstrates that operational marginal cost is a lower bound for total short-run marginal cost and may considerably underestimate actual short-run marginal cost even in the complete absence of market power.
Download InfoTo our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
Bibliographic InfoArticle provided by Southern Economic Association in its journal Southern Economic Journal.
Volume (Year): 75 (2009)
Issue (Month): 3 (January)
Find related papers by JEL classification:
- D4 - Microeconomics - - Market Structure and Pricing
- L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
- L4 - Industrial Organization - - Antitrust Issues and Policies
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Lewis Evans & Graeme Guthrie, 2011.
"An Examination of Frank Wolak’s Model of Market Power and its Application to the New Zealand Electricity Market,"
Working Papers in Economics
11/10, University of Canterbury, Department of Economics and Finance.
- Lewis Evans & Graeme Guthrie, 2012. "An examination of Frank Wolak's model of market power and its application to the New Zealand electricity market," New Zealand Economic Papers, Taylor and Francis Journals, vol. 46(1), pages 25-34, December.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Laura Razzolini).
If references are entirely missing, you can add them using this form.