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Generation Adequacy and Investment Incentives in Britain: from the Pool to NETA

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Author Info

  • Roques, F.
  • Newbery, D.M.
  • Nuttall, W.J.

Abstract

Three years after the controversial change of the British market design from compulsory Pool with capacity payments to decentralised energy-only New Electricity Trading Arrangements (NETA) market framework, we compare the two designs in terms of investment incentives. We review the biases of the Pool capacity payments design, the drought of investment following the introduction of NETA, and the reaction of the market during the first “stress-test” of NETA during the winter 2003. In an energy-only market such as NETA, it is essential that price signals are right and the system operator has a crucial role in contracting ahead for reserve. We recommend that NETA adopt a single marginal imbalance price as dual imbalance pricing distorts price signals in times of scarcity. The lack of long-term contracting that causes hedging and financing difficulties for power projects can be compensated by vertical and horizontal reintegration at a cost of increased market power.

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Bibliographic Info

Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 0459.

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Length: 51
Date of creation: Oct 2004
Date of revision:
Handle: RePEc:cam:camdae:0459

Note: CMI, IO
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Related research

Keywords: investment; electricity; market design; capacity payments;

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References

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  1. Newbery, D., 2006. "Market design," Cambridge Working Papers in Economics 0615, Faculty of Economics, University of Cambridge.
  2. Neuhoff, Karsten & De Vries, Laurens, 2004. "Insufficient incentives for investment in electricity generations," Utilities Policy, Elsevier, vol. 12(4), pages 253-267, December.
  3. Paul Joskow & Jean Tirole, 2004. "Retail Electricity Competition," Working Papers 0409, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research.
  4. Joskow, Paul L & Tirole, Jean, 2007. "Reliability and Competitive Electricity Markets," CEPR Discussion Papers 6121, C.E.P.R. Discussion Papers.
  5. Green, Richard, 2002. "Retail Competition and Electricity Contracts," Royal Economic Society Annual Conference 2002 93, Royal Economic Society.
  6. Sweeting, A., 2004. "Market Power in the England and Wales Wholesale Electricity Market 1995-2000," Cambridge Working Papers in Economics 0455, Faculty of Economics, University of Cambridge.
  7. Newbery, David M., 1998. "The regulator's review of the English Electricity Pool," Utilities Policy, Elsevier, vol. 7(3), pages 129-141, November.
  8. Woo, Chi-Keung & Lloyd, Debra & Tishler, Asher, 2003. "Electricity market reform failures: UK, Norway, Alberta and California," Energy Policy, Elsevier, vol. 31(11), pages 1103-1115, September.
  9. Catherine D. Wolfram, 1999. "Measuring Duopoly Power in the British Electricity Spot Market," American Economic Review, American Economic Association, vol. 89(4), pages 805-826, September.
  10. Robert H. Patrick & Frank A. Wolak, 2001. "Estimating the Customer-Level Demand for Electricity Under Real-Time Market Prices," NBER Working Papers 8213, National Bureau of Economic Research, Inc.
  11. Newbery, D.M. & Pollitt, M.G., 1996. "The Restructuring and Privatisation of the CEGB: Was It Worth It?," Cambridge Working Papers in Economics 9607, Faculty of Economics, University of Cambridge.
  12. Shuttleworth, Graham, 1997. "Getting markets to clear," The Electricity Journal, Elsevier, vol. 10(3), pages 2-2, April.
  13. Hung-po Chao, 1983. "Peak Load Pricing and Capacity Planning with Demand and Supply Uncertainty," Bell Journal of Economics, The RAND Corporation, vol. 14(1), pages 179-190, Spring.
  14. Richard Green, 2004. "Did English Generators Play Cournot? Capacity withholding in the Electricity Pool," Working Papers 0410, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research.
  15. Joskow, Paul L, 1987. "Contract Duration and Relationship-Specific Investments: Empirical Evidence from Coal Markets," American Economic Review, American Economic Association, vol. 77(1), pages 168-85, March.
  16. Ford, Andrew, 1999. "Cycles in competitive electricity markets: a simulation study of the western United States," Energy Policy, Elsevier, vol. 27(11), pages 637-658, October.
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Cited by:
  1. Brunekreeft, G. & McDaniel, T., 2005. "Policy uncertainty and supply adequacy in electric power," Discussion Paper 2005-006, Tilburg University, Tilburg Law and Economic Center.
  2. Rosellon, Juan, 2006. "Different Approaches to Supply Adequacy in Electricity Markets," MPRA Paper 21944, University Library of Munich, Germany.
  3. Karakatsani, Nektaria V. & Bunn, Derek W., 2008. "Forecasting electricity prices: The impact of fundamentals and time-varying coefficients," International Journal of Forecasting, Elsevier, vol. 24(4), pages 764-785.
  4. Karakatsani, Nektaria V. & Bunn, Derek W., 2008. "Intra-day and regime-switching dynamics in electricity price formation," Energy Economics, Elsevier, vol. 30(4), pages 1776-1797, July.

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