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Capacity Choices in Liberalized Electricity Markets

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  • Castro-Rodriguez, Fidel
  • Marín Uribe, Pedro Luis
  • Siotis, Georges

Abstract

We develop a theoretical model of long-run investment decisions on capacity in the context of a liberalized electricity market. The sector's idiosyncrasies such as the uncertainty surrounding future supply and demand, as well as technological constraints, are explicitly modelled. The model is sufficiently flexible to describe the situation in different systems. We derive the level of capacity that maximizes social welfare, and compare it to a decentralized outcome. We show that in the absence of any regulation, private investment decisions on capacity unambiguously lead to a socially sub-optimal outcome, and we illustrate these results using simulations.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2998.

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Date of creation: Oct 2001
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Handle: RePEc:cpr:ceprdp:2998

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Related research

Keywords: capacity; electricity; liberalization; long-run investment; regulation;

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Cited by:
  1. Steven Brakman & J.G.M. van Marrewijk & A. van Witteloostuijn, 2009. "Market liberalization in the European natural gas market : the importance of capacity constraints and efficiency differences," Working Papers 09-15, Utrecht School of Economics.
  2. Moreno, Fermín & Martínez-Val, José M., 2011. "Collateral effects of renewable energies deployment in Spain: Impact on thermal power plants performance and management," Energy Policy, Elsevier, vol. 39(10), pages 6561-6574, October.
  3. Boom, Anette, 2009. "Vertically integrated firms' investments in electricity generating capacities," International Journal of Industrial Organization, Elsevier, vol. 27(4), pages 544-551, July.
  4. Serra, Pablo, 2013. "Contract market power and its impact on the efficiency of the electricity sector," Energy Policy, Elsevier, vol. 61(C), pages 653-662.
  5. Aitor Ciarreta & María Espinosa, 2010. "Market power in the Spanish electricity auction," Journal of Regulatory Economics, Springer, vol. 37(1), pages 42-69, February.
  6. Arellano, Maria-Soledad & Serra, Pablo, 2007. "A model of market power in electricity industries subject to peak load pricing," Energy Policy, Elsevier, vol. 35(10), pages 5130-5135, October.
  7. 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.
  8. John FitzGerald, 2002. "The Irish Energy Market - Putting the Customer First," Papers WP145, Economic and Social Research Institute (ESRI).
  9. Anette Boom, . "Investments in Electricity Generation Capacity under Different Market Structures with Price Responsive Demand," Papers 016, Departmental Working Papers.
  10. Lachman, Daniël A., 2011. "Leapfrog to the future: Energy scenarios and strategies for Suriname to 2050," Energy Policy, Elsevier, vol. 39(9), pages 5035-5044, September.
  11. Sherzod Tashpulatov & Lubomir Lizal, 2012. "Can Producers Apply a Capacity Cutting Strategy to Increase Prices? The Case of the England and Wales Electricity Market," CERGE-EI Working Papers wp465, The Center for Economic Research and Graduate Education - Economic Institute, Prague.

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