Investment Incentives and Auction Design in Electricity Markets
Abstract
Motivated by the regulatory debate in electricity markets, we seek to understand how market design affects market performance through its impact on investment incentives. For this purpose, we study a two-stage game in which firms choose their capacities under demand uncertainty prior to bidding into the spot market. We analyse a number of different market design elements, including (i) two commonly used auction formats, the uniform-price and discriminatory auctions, (ii) price-caps and (iii) bid duration. We find that, although the discriminatory auction tends to lower prices, this does not imply that investment incentives at the margin are poorer; indeed, under reasonable assumptions on the shape of the demand distribution, the discriminatory auction induces (weakly) stronger investment incentives than the uniform-price format.Download Info
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Bibliographic Info
Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6626.Length:
Date of creation: Jan 2008
Date of revision:
Handle: RePEc:cpr:ceprdp:6626
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Related research
Keywords: electricity; investment; market design; regulatory reform; uniform price and discriminatory auctions;Other versions of this item:
- Fabra, Natalia & Fehr, Nils-Henrik M von der & Frutos, María Ángeles de, . "Investment incentives and auction design in electricity markets," Open Access publications from Universidad Carlos III de Madrid info:hdl:10016/4315, Universidad Carlos III de Madrid.
- D44 - Microeconomics - - Market Structure and Pricing - - - Auctions
- L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
- L5 - Industrial Organization - - Regulation and Industrial Policy
- L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-04-12 (All new papers)
- NEP-COM-2008-04-12 (Industrial Competition)
- NEP-ENE-2008-04-12 (Energy Economics)
- NEP-MIC-2008-04-12 (Microeconomics)
References
References listed on IDEASPlease 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.:
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Citations
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.Cited by:
- Sakellaris, Kostis, 2010. "Modeling Electricity Markets as Two-Stage Capacity Constrained Price Competition Games under Uncertainty," MPRA Paper 23317, University Library of Munich, Germany.
- Léautier, Thomas-Olivier, 2011.
"The Visible Hand: Ensuring Optimal Investment in Electric Power Generation,"
IDEI Working Papers
605, Institut d'Économie Industrielle (IDEI), Toulouse, revised 19 Aug 2012.
- Léautier, Thomas-Olivier, 2011. "The Visible Hand: Ensuring Optimal Investment in Electric Power Generation," TSE Working Papers 10-153, Toulouse School of Economics (TSE), revised 19 Aug 2012.
- Marx, Leslie M. & Shaffer, Greg, 2010. "Break-up fees and bargaining power in sequential contracting," International Journal of Industrial Organization, Elsevier, vol. 28(5), pages 451-463, September.
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