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Conventional Power Plants in Liberalized Electricity Markets with Renewable Entry

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  • Gerard Llobet and Jorge Padilla

Abstract

This paper examines the optimal capacity choices of conventional power generators after the introduction of renewable production. We start with a basic and generally accepted model of the liberalized wholesale electricity market in which firms have insufficient incentives to invest and we illustrate how the entry of renewable generation tends to aggravate that problem. We show that the incentives to invest in firm capacity (e.g. conventional thermal plants) may be restored by means of a capacity auction mechanism. That mechanism is vulnerable and, hence, may prove ineffective unless governments can credibly commit not to sponsor the entry of new capacity outside the auction mechanism. We explain that such commitment may be particularly difficult in the current political context where energy policy is conditioned by environmental and industrial-policy goals. We finally propose a way to enhance the credibility of capacity auctions by committing to optimally retire idle (conventional) power plants in response to entry outside the auction.

Suggested Citation

  • Gerard Llobet and Jorge Padilla, 2018. "Conventional Power Plants in Liberalized Electricity Markets with Renewable Entry," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3).
  • Handle: RePEc:aen:journl:ej39-3-llobet
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    Cited by:

    1. Holmberg, P. & Ritz, R., 2019. "Capacity mechanisms and the technology mix in competitive electricity markets," Cambridge Working Papers in Economics 1960, Faculty of Economics, University of Cambridge.
    2. Fabra, Natalia, 2018. "A primer on capacity mechanisms," Energy Economics, Elsevier, vol. 75(C), pages 323-335.
    3. Sylwia Bialek & Burcin Unel, 2020. "Efficiency in Wholesale Electricity Markets: On the Role of Externalities and Subsidies," CESifo Working Paper Series 8673, CESifo.
    4. Bialek, Sylwia & Ünel, Burçin, 2022. "Efficiency in wholesale electricity markets: On the role of externalities and subsidies," Energy Economics, Elsevier, vol. 109(C).
    5. Fabra, Natalia, 2021. "The energy transition: An industrial economics perspective," International Journal of Industrial Organization, Elsevier, vol. 79(C).
    6. Pär Holmberg & Thomas Tangerås, 2021. "Strategic Reserves versus Market-wide Capacity Mechanisms," Working Papers EPRG2109, Energy Policy Research Group, Cambridge Judge Business School, University of Cambridge.
    7. Gholami, Mina Bahrami & Poletti, Stephen & Staffell, Iain, 2021. "Wind, rain, fire and sun: Towards zero carbon electricity for New Zealand," Energy Policy, Elsevier, vol. 150(C).
    8. Fabra, Natalia & Llobet, Gerard, 2019. "Auctions with Unknown Capacities: Understanding Competition among Renewables," CEPR Discussion Papers 14060, C.E.P.R. Discussion Papers.
    9. Peña, Juan Ignacio & Rodríguez, Rosa & Mayoral, Silvia, 2022. "Cannibalization, depredation, and market remuneration of power plants," Energy Policy, Elsevier, vol. 167(C).

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