Investment decisions in Liberalized Electricity Markets: A framework of Peak Load Pricing with strategic firms
AbstractIn this article we analyze firms investment incentives in liberalized electricity markets. Since electricity is economically non storable, it is optimal for firms to invest in a differentiated portfolio of technologies in order to serve strongly fluctuating demand. Prior to the Liberalization of electricity markets, for regulated monopolists, optimal investment and pricing strategies haven been analyzed in the peak load pricing literature (compare Crew and Kleindorfer (1986)). In restructured electricity markets regulated monopolistic generators have often been replaced by competing and potentially strategic firms. This article aims to respond to the changed reality and model investment decisions of strategic firms in those markets. We derive equilibrium investment for strategic firms and compare to the benchmark cases of perfect competition and monopoly outcomes. We find that strategic firms have an incentive to overinvest in base-load technologies but choose total capacities too low from a welfare point of view. By fitting the framework to a specific electricity market (Germany) we are able to empirically analyze Investment choices of strategic firms, and quantify the potential for market power and its impact on generation portfolios in restructured electricity markets in the long run.
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Bibliographic InfoPaper provided by University of Cologne, Department of Economics in its series Working Paper Series in Economics with number 38.
Date of creation: 26 May 2008
Date of revision:
Investment Decisions; Technology Choice; Restructured Electricity Markets; Peak Load Pricing; Strategic Firms;
Other versions of this item:
- Gregor, ZOETTL, 2008. "Investment decisions in liberalized electricity markets : A framework of peak load pricing with strategic firms," Discussion Papers (ECON - DÃ©partement des Sciences Economiques) 2008029, Université catholique de Louvain, Département des Sciences Economiques.
- ZOETTL, Gregor, 2008. "Investment decisions in liberalized electricity markets: A framework of peak load pricing with strategic firms," CORE Discussion Papers 2008041, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- NEP-ALL-2008-06-07 (All new papers)
- NEP-CSE-2008-06-07 (Economics of Strategic Management)
- NEP-ENE-2008-06-07 (Energy Economics)
- NEP-MIC-2008-06-07 (Microeconomics)
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