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Reliability and Competitive Electricity Markets

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Author Info
Joskow, Paul L
Tirole, Jean

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Abstract

This paper seeks to bridge the gap between economists focused on designing competitive market mechanisms and engineers focused on the physical attributes and engineering requirements they perceive as being needed for operating a reliable electric power system. The paper starts by deriving the (second-best) optimal prices and investment program when there are price-insensitive retail consumers, but when 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 analyzes the interrelationships between regulator-imposed price caps and capacity obligations. 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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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6121.

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Date of creation: Feb 2007
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Handle: RePEc:cpr:ceprdp:6121

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Related research
Keywords: electricity incentives regulation

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Find related papers by JEL classification:
L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
L5 - Industrial Organization - - Regulation and Industrial Policy
L9 - Industrial Organization - - Industry Studies: Transportation and Utilities

This paper has been announced in the following NEP Reports:

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, 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!]
  2. 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!]
  3. JOSKOW, Paul & TIROLE, Jean, 2004. "Retail Electricity Competition," IDEI Working Papers 311, Institut d'Économie Industrielle (IDEI), Toulouse. [Downloadable!]
    Other versions:
  4. 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!]
  5. 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:
  6. 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!]
  7. Machiel Mulder & Gijsbert Zwart, 2006. "Market failures and government policies in gas markets," CPB Memoranda 143, CPB Netherlands Bureau for Economic Policy Analysis. [Downloadable!]
  8. 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!]
  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. 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!]
  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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