The Trouble With Electricity Markets (and some solutions)
AbstractSince June 2000, California's electricity market has produced extremely high prices and threats of supply shortages. But California's is only the most recent and visible example of the trouble with deregulated wholesale electricity markets. In this paper, Borenstein argues that the difficulties that have appeared in California and elsewhere are intrinsic to the design of current electricity markets, in which demand exhibits virtually no price responsiveness and supply faces strict production constraints. Such a structure will necessarily lead to periods of shortage and of surplus, which will be accompanied by great volatility in prices and profits. This result, however, is not inevitable. By encouraging price-responsive demand and long-term wholesale contracts for electricity, policy makers can create electricity markets that will function much more smoothly.
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Bibliographic InfoPaper provided by Regulation2point0 in its series Working paper with number 394.
Date of creation: Jan 2001
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