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Optimal wholesale pricing and investment in generation: the basics

In: Handbook on Electricity Markets

Author

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  • Paul L. Joskow
  • Thomas-Olivier Léautier

Abstract

This chapter presents the basic microeconomic theory underlying the formation and the structure of efficient wholesale power prices and optimal investment in dispatchable generating capacity. The presentation in the chapter is designed to be accessible to non-economists interested in understanding the basic economics of electricity supply and demand. We use examples and graphics rather than mathematics to articulate the relevant microeconomic principles.The examples evolve to capture more complex characterizations of demand, generation technology, resource adequacy and reliability. The chapter also provides a theoretical link between the "old world" of vertically integrated regulated electricity monopolies and the "new world" based on vertical and horizontal restructuring to support competitive wholesale markets.

Suggested Citation

  • Paul L. Joskow & Thomas-Olivier Léautier, 2021. "Optimal wholesale pricing and investment in generation: the basics," Chapters, in: Jean-Michel Glachant & Paul L. Joskow & Michael G. Pollitt (ed.), Handbook on Electricity Markets, chapter 3, pages 36-72, Edward Elgar Publishing.
    • Handle: RePEc:elg:eechap:18895_3
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