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Restructuring Electricity Markets when Demand is Uncertain: Effects on Capacity Investments, Prices and Welfare

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Author Info

  • Anette Boom

    (Copenhagen Business School)

  • Stefan Buehler

    (University of Zurich)

Abstract

We examine the effects of restructuring electricity markets on capacity investments, retail prices and welfare when demand is uncertain. We study the following market configurations: (i) integrated monopoly, (ii) integrated duopoly with wholesale trade, and (iii) separated duopoly with wholesale trade. Assuming that wholesale prices can react to changes in retail prices (but not vice versa), we find that generators install sufficient capacity to serve retail demand in each market configuration, thus avoiding blackouts. Furthermore, aggregate capacity levels and retail prices are such that the separated (integrated) duopoly with wholesale trade performs best (worst) in terms of welfare.

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File URL: http://www.econ.ku.dk/cie/dp/dp_2010/2007-09.pdf/
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Bibliographic Info

Paper provided by University of Copenhagen. Department of Economics. Centre for Industrial Economics in its series CIE Discussion Papers with number 2007-09.

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Length: 24 pages
Date of creation: Aug 2007
Date of revision:
Handle: RePEc:kud:kuieci:2007-09

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Related research

Keywords: electricity; investments; generating capacities; vertical integration; monopoly and competition;

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References

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  1. Von der Fehr, N.H.M. & Harbord, D., 1992. "Spot Market Competition in the UK Electricity Industry," Memorandum 09/1992, Oslo University, Department of Economics.
  2. Castro-Rodriguez, Fidel & Marín Uribe, Pedro Luis & Siotis, Georges, 2001. "Capacity Choices in Liberalized Electricity Markets," CEPR Discussion Papers 2998, C.E.P.R. Discussion Papers.
  3. Sheshinski, Eytan & Dreze, Jacques H, 1976. "Demand Fluctuations, Capacity Utilization, and Costs," American Economic Review, American Economic Association, vol. 66(5), pages 731-42, December.
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Cited by:
  1. Boom, Anette & Schwenen, Sebastian, 2012. "Real-time Pricing in Power Markets: Who Gains?," Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century 66062, Verein für Socialpolitik / German Economic Association.
  2. Baldursson , Fridrik M. & von der Fehr, Nils-Henrik, 2007. "Vertical Integration and Long-Term Contracts in Risky Markets," Memorandum 01/2007, Oslo University, Department of Economics.

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