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The Trouble With Electricity Markets: Understanding California's Restructuring Disaster

  • Severin Borenstein

In June 2000, after two years of fairly smooth operation, California's deregulated wholesale electricity market began producing extremely high prices and threats of supply shortages. The upheaval demonstrated dramatically why most current electricity markets are extremely volatile: demand is difficult to forecast and exhibits virtually no price responsiveness, while supply faces strict production constraints and prohibitive storage costs. This structure leads to periods of surplus and of shortage, the latter exacerbated by sellers' ability to exercise market power. Electricity markets can function much more smoothly, however, if they are designed to support price-responsive demand and long-term wholesale contracts for electricity.

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/0895330027175
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Article provided by American Economic Association in its journal Journal of Economic Perspectives.

Volume (Year): 16 (2002)
Issue (Month): 1 (Winter)
Pages: 191-211

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Handle: RePEc:aea:jecper:v:16:y:2002:i:1:p:191-211
Note: DOI: 10.1257/0895330027175
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  1. Borenstein, Severin, 1999. "Understanding Competitive Pricing and Market Power in Wholesale Electricity Markets," Competition Policy Center, Working Paper Series qt00p2p3wv, Competition Policy Center, Institute for Business and Economic Research, UC Berkeley.
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