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Reliability and Competitive Electricity Markets

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Author Info
Joskow, P.
Tirole, J.

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Abstract

Deregulation of the electricity sector has resulted in conflict between the economic aims of creating competitive wholesale and retail markets, and an engineering focus on reliability of supply. The paper starts by deriving the optimal prices and investment program when there are price-insensitive retail consumers, and their load serving entities can choose any level of rationing they prefer contingent on real time prices. It then examines the assumptions required for a competitive wholesale and retail market to achieve this optimal price and investment program. The paper analyses the implications of relaxing several of these assumptions. First, it analyses the interrelationships between regulator-imposed price caps, capacity obligations, and system operator procurement, dispatch and compensation arrangements. It goes on to explore the implications of potential network collapses, the concomitant need for operating reserve requirements and whether market prices will provide incentives for investments consistent with these reserve requirements.

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File URL: http://www.econ.cam.ac.uk/electricity/publications/wp/ep53.pdf
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Publisher Info
Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 0450.

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Length: 51
Date of creation: Oct 2004
Date of revision:
Handle: RePEc:cam:camdae:0450

Note: CMI, IO
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Web page: http://www.econ.cam.ac.uk/index.htm

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Related research
Keywords: electricity regulation incentives

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Find related papers by JEL classification:
L33 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Boundaries of Public and Private Enterprise; Privatization; Contracting Out
L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
L98 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Government Policy

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Frank A. Wolak, 2000. "An Empirical Analysis Of The Impact Of Hedge Contracts On Bidding Behavior In A Competitive Electricity Market ," International Economic Journal, Korean International Economic Association, vol. 14(2), pages 1-39, June. [Downloadable!] (restricted)
  2. Joskow, P. & Tirole, J., 2004. "‘Retail Electricity Competition’," Cambridge Working Papers in Economics 0430, Faculty of Economics, University of Cambridge. [Downloadable!]
    Other versions:
  3. Chao, Hung-po & Wilson, Robert, 1987. "Priority Service: Pricing, Investment, and Market Organization," American Economic Review, American Economic Association, vol. 77(5), pages 899-916, December. [Downloadable!] (restricted)
  4. Green, Richard, 1999. "The Electricity Contract Market in England and Wales," Journal of Industrial Economics, Blackwell Publishing, vol. 47(1), pages 107-24, March. [Downloadable!] (restricted)
  5. Severin Borenstein & Stephen P. Holland, 2003. "On the Efficiency of Competitive Electricity Markets With Time-Invariant Retail Prices," NBER Working Papers 9922, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  6. Allaz Blaise & Vila Jean-Luc, 1993. "Cournot Competition, Forward Markets and Efficiency," Journal of Economic Theory, Elsevier, vol. 59(1), pages 1-16, February. [Downloadable!] (restricted)
  7. Littlechild, S.C., 2000. "Why We Need Electricity Retailers: A Reply to Joskow on Wholesale Spot Price pass-through," Cambridge Working Papers in Economics 0008, Faculty of Economics, University of Cambridge. [Downloadable!]
  8. David M. Newbery, 1998. "Competition, Contracts, and Entry in the Electricity Spot Market," RAND Journal of Economics, The RAND Corporation, vol. 29(4), pages 726-749, Winter. [Downloadable!] (restricted)
    Other versions:
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Paul L. Joskow, 2005. "Markets For Power In The United States - An Interim Assessment," Working Papers 0512, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research. [Downloadable!]
  2. Joskow, P. & Tirole, J., 2004. "‘Retail Electricity Competition’," Cambridge Working Papers in Economics 0430, Faculty of Economics, University of Cambridge. [Downloadable!]
    Other versions:
  3. Paul L. Joskow, 2006. "Competitive Electricity Markets And Investment In New Generating Capacity," Working Papers 0609, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research. [Downloadable!]
  4. Gregor Zoettl, 2008. "Investment decisions in Liberalized Electricity Markets: A framework of Peak Load Pricing with strategic firms," Working Paper Series in Economics 38, University of Cologne, Department of Economics. [Downloadable!]
  5. Anette Boom & Stefan Buehler, 2007. "Restructuring Electricity Markets when Demand is Uncertain: Effects on Capacity Investments, Prices and Welfare," CIE Discussion Papers 2007-09, University of Copenhagen. Department of Economics. Centre for Industrial Economics. [Downloadable!]
  6. Glachant, J.M. & Saguan, M., 2007. "An Institutional Frame to Compare Alternative Market Designs in EU Electricity Balancing," Cambridge Working Papers in Economics 0724, Faculty of Economics, University of Cambridge. [Downloadable!]
    Other versions:
  7. Roques, F.A. & Savva , N.S., 2006. "Price Cap Regulation and Investment Incentives under Demand Uncertainty," Cambridge Working Papers in Economics 0636, Faculty of Economics, University of Cambridge. [Downloadable!]
  8. Vajjhala, Shalini & Paul, Anthony & Sweeney, Richard & Palmer, Karen, 2008. "Green Corridors: Linking Interregional Transmission Expansion and Renewable Energy Policies," Discussion Papers dp-08-06, Resources For the Future. [Downloadable!]
  9. Brunekreeft, G. & McDaniel, T., 2005. "Policy uncertainty and supply adaquacy in electric power markets," Discussion Paper 06, Tilburg University, Tilburg Law and Economic Center. [Downloadable!]
  10. Machiel Mulder & Gijsbert Zwart, 2006. "Market failures and government policies in gas markets," CPB Memoranda 143, CPB Netherlands Bureau for Economic Policy Analysis. [Downloadable!]
  11. Anette Boom, 2007. "Vertically Integrated Firms' Investments in Electricity Generating Capacities," CIE Discussion Papers 2007-14, University of Copenhagen. Department of Economics. Centre for Industrial Economics. [Downloadable!]
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