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Investment Incentives and Electricity Market Design: the British Experience

Author

Listed:
  • Roques Fabien A.

    (Judge Institute of Management, University of Cambridge, England)

  • Newbery David M.

    (Department of Applied Economics, University of Cambridge, England)

  • Nuttall William J.

    (Judge Institute of Management, University of Cambridge, England)

Abstract

There is no academic consensus on which electricity market design provides the least distorting investment incentives. Theory suggests that "energy-only market" can allow capacity cost recovery by generators. However, separate payments for capacity or reserve obligations do not need to rely on infrequent price spikes to remunerate reserve capacity. Three years after the controversial change from the compulsory British Electricity Pool with capacity payments to the decentralised energyonly New Electricity Trading Arrangements (NETA), we contrast the two market designs in terms of investment incentives, analyse NETA's balancing market failures, and review the case for regulatory support for investment.

Suggested Citation

  • Roques Fabien A. & Newbery David M. & Nuttall William J., 2005. "Investment Incentives and Electricity Market Design: the British Experience," Review of Network Economics, De Gruyter, vol. 4(2), pages 1-36, June.
    • Handle: RePEc:bpj:rneart:v:4:y:2005:i:2:n:1
    DOI: 10.2202/1446-9022.1068
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