Increasing the reliability of electricity production: a cost-benefit analysis
AbstractThis report analyses three instruments aimed at increasing the reliability of electricity production. Read also the accompanying press release and Special Publication ' Energy policies and risks on energy markets; a cost-benefit analysis '. In the system of capacity markets, the transmission system operator (TSO) requires traders to back their own peak load plus a prescribed level of spare capacity with contracted capacity, the latter being tradable at secondary markets. With reserve contracts, the TSO contracts spare capacity from producers, holding it to be dispatched in case of a crisis. Capacity payments are a subsidy on capital costs, giving producers an incentive to build more capacity. These measures prove to be inefficient in preventing price spikes, as the welfare costs of price spikes are lower than the costs of the policy options unless price spikes occur in an implausibly high frequency. Capacity payments cannot prevent black-outs, as they do not induce enough investments in spare capacity. Black-outs can be prevented by capacity markets and reserve contracts, but at a high cost. Even if a 24-hour black-out of the Randstad area occurred every five years, it would be cheaper to accept the consequences of the black-out than to prevent it.
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Bibliographic InfoPaper provided by CPB Netherlands Bureau for Economic Policy Analysis in its series CPB Document with number 52.
Date of creation: Mar 2004
Date of revision:
Find related papers by JEL classification:
- D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate
- L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
- Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-03-22 (All new papers)
- NEP-COM-2004-03-22 (Industrial Competition)
- NEP-DEV-2004-03-22 (Development)
- NEP-MIC-2004-03-22 (Microeconomics)
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