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Cycles in deregulated electricity markets: Empirical evidence from two decades

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  • Arango, Santiago
  • Larsen, Erik

Abstract

In this article, we discuss the "cycle hypothesis" in electricity generation, which states that the introduction of deregulation in an electricity system might lead to sustained fluctuations of over- and under-capacity. The occurrence of cycles is one of the major threats for electricity markets as it affects the security of supply, and creates uncertainty in both the profitability of electricity companies and in consumer prices. We discuss the background for these cycles using analogies with other capital-intensive industries, along with evidence from the analysis of behavioral simulation models as well as from experimental electricity markets. Using data from the oldest deregulated markets we find support for the hypothesis in the case of the English and Chilean markets, based on an autocorrelation analysis. Evidence from the Nordpool market is more ambiguous, although we might be observing the first half of a cycle in generation capacity. Comparing a simulation of the English market performed in 1992 with the actual performance we can observe that the qualitative behavior of the model is consistent with the actual evolution. Finally, we discuss possible mechanisms for damping cycles in electricity generation, such as mothballing, capacity payments, and reliability markets.

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  • Arango, Santiago & Larsen, Erik, 2011. "Cycles in deregulated electricity markets: Empirical evidence from two decades," Energy Policy, Elsevier, vol. 39(5), pages 2457-2466, May.
  • Handle: RePEc:eee:enepol:v:39:y:2011:i:5:p:2457-2466
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    Cited by:

    1. Hary, Nicolas & Rious, Vincent & Saguan, Marcelo, 2016. "The electricity generation adequacy problem: Assessing dynamic effects of capacity remuneration mechanisms," Energy Policy, Elsevier, vol. 91(C), pages 113-127.
    2. Bublitz, Andreas & Keles, Dogan & Zimmermann, Florian & Fraunholz, Christoph & Fichtner, Wolf, 2018. "A survey on electricity market design: Insights from theory and real-world implementations of capacity remuneration mechanisms," Working Paper Series in Production and Energy 27, Karlsruhe Institute of Technology (KIT), Institute for Industrial Production (IIP).
    3. Ramírez-Camperos, Adriana María & Rodríguez-Padilla, Víctor & Guido-Aldana, Pedro Antonio, 2013. "The Mexican electricity sector: Policy analysis and reform (1992–2009)," Energy Policy, Elsevier, vol. 62(C), pages 1092-1103.
    4. Ruben Bibas & Aurélie Méjean, 2012. "Negative emissions and ambitious climate policies in a second best world: A general equilibrium assessment of technology options in the electricity sector," EcoMod2012 4569, EcoMod.
    5. Arango, Santiago & Castañeda, Jaime A. & Larsen, Erik R., 2013. "Mothballing in power markets: An experimental study," Energy Economics, Elsevier, vol. 36(C), pages 125-134.
    6. Ringler, Philipp & Keles, Dogan & Fichtner, Wolf, 2017. "How to benefit from a common European electricity market design," Energy Policy, Elsevier, vol. 101(C), pages 629-643.
    7. repec:eee:energy:v:135:y:2017:i:c:p:598-609 is not listed on IDEAS
    8. Olsina, Fernando & Pringles, Rolando & Larisson, Carlos & Garcés, Francisco, 2014. "Reliability payments to generation capacity in electricity markets," Energy Policy, Elsevier, vol. 73(C), pages 211-224.
    9. Morgan Bazilian & Patrick Nussbaumer & Hans-Holger Rogner & Abeeku Brew-Hammond & Vivien Foster & Shonali Pachauri & Eric Williams & Mark Howells & Philippe Niyongabo & Lawrence Musaba & Brian Ó Galla, 2011. "Energy Access Scenarios to 2030 for the Power Sector in Sub-Saharan Africa," Working Papers 2011.68, Fondazione Eni Enrico Mattei.
    10. Olaya, Yris & Arango-Aramburo, Santiago & Larsen, Erik R., 2016. "How capacity mechanisms drive technology choice in power generation: The case of Colombia," Renewable and Sustainable Energy Reviews, Elsevier, vol. 56(C), pages 563-571.
    11. Miguel Pérez de Arce and Enzo Sauma, 2016. "Comparison of Incentive Policies for Renewable Energy in an Oligopolistic Market with Price-Responsive Demand," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3).
    12. Brouwer, Anne Sjoerd & van den Broek, Machteld & Özdemir, Özge & Koutstaal, Paul & Faaij, André, 2016. "Business case uncertainty of power plants in future energy systems with wind power," Energy Policy, Elsevier, vol. 89(C), pages 237-256.
    13. Ruben Bibas & Aurélie Méjean, 2014. "Potential and limitations of bioenergy for low carbon transitions," Climatic Change, Springer, vol. 123(3), pages 731-761, April.

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