On investment decisions in liberalized electricity markets: the impact of price caps at the spot market
AbstractWe analyze the impact of a uniform price cap at electricity spot markets on firms investment decisions and on welfare. Since investment decisions for those markets are taken in the long run, fluctuating demand at the spot market eventually gives rise to high price spikes in case of binding capacities. Those price spikes are considered to send accurate signals for investment in generation capacities, limiting those spikes by price caps is thought to reduce firms' investment incentives. We are able to show that this is not true for the case of strategic investment behavior. More specifically we analyze a market game where firms choose capacities prior to a spot market which is subject to fluctuating or uncertain demand. We derive, that appropriately chosen price caps do always increase firms investment incentives under imperfect competition. We furthermore characterize the optimal price cap. Based on the theoretical framework, we empirically analyze the impact of uniform price caps on the German electricity market.
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Bibliographic InfoPaper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2008037.
Date of creation: 01 Jun 2008
Date of revision:
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Investment incentives; price caps; fluctuating demand; electricity markets;
Other versions of this item:
- Gregor, ZOETTL, 2008. "On investment decisions in liberalized electricity markets : the impact of price caps at the spot market," Discussion Papers (ECON - DÃ©partement des Sciences Economiques) 2008028, Université catholique de Louvain, Département des Sciences Economiques.
- D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
- D41 - Microeconomics - - Market Structure and Pricing - - - Perfect Competition
- D42 - Microeconomics - - Market Structure and Pricing - - - Monopoly
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-11-25 (All new papers)
- NEP-ENE-2008-11-25 (Energy Economics)
- NEP-MIC-2008-11-25 (Microeconomics)
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- Sakellaris, Kostis, 2010. "Modeling Electricity Markets as Two-Stage Capacity Constrained Price Competition Games under Uncertainty," MPRA Paper 23317, University Library of Munich, Germany.
- Malte SunderkÃ¶tter, 2011. "Fuel mix characteristics and expected stock returns of European power companies," EWL Working Papers 11056, University of Duisburg-Essen, Chair for Management Science and Energy Economics, revised Oct 2011.
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