Insufficient incentives for investment in electricity generations
In theory, competitive electricity markets can provide incentives for efficient investment in generating capacity. We show that if consumers and investors are risk averse, investment is efficient only if investors in generating capacity can sign long-term contracts with consumers. Otherwise the uncovered price risk increases financing costs, reduces equilibrium investment levels, distorts technology choice towards less capital-intensive generation and reduces consumer utility. We observe insufficient levels of long-term contracts in existing markets, possibly because retail companies are not credible counter-parties if their final customer can switch easily. With consumer franchise, retailers can sign long-term contracts, but this solution comes at the expense of the idea of retail competition. Alternative capacity mechanisms to stimulate investment are discussed.
(This abstract was borrowed from another version of this item.)
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Simon Cowan, 2004.
"Utility Regulation and Risk Allocation: The Roles of Marginal Cost Pricing and Futures Markets,"
Journal of Regulatory Economics,
Springer, vol. 26(1), pages 23-40, 07.
- Simon GB Cowan & Simon Cowan, 2002. "Utility Regulation and Risk Allocation: The Roles of Marginal Cost Pricing and Futures Markets," Economics Series Working Papers 100, University of Oxford, Department of Economics.
- Green, Richard, 2002. "Retail Competition and Electricity Contracts," Royal Economic Society Annual Conference 2002 93, Royal Economic Society.
- Green, R., 2004. "Retail Competition and Electricity Contracts," Cambridge Working Papers in Economics 0406, Faculty of Economics, University of Cambridge.
- Paul L. Joskow & Edward Kohn, 2002. "A Quantitative Analysis of Pricing Behavior in California's Wholesale Electricity Market During Summer 2000," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 1-35.
- Paul Joskow & Edward Kahn, 2001. "A Quantitative Analysis of Pricing Behavior in California's Wholesale Electricity Market During Summer 2000," NBER Working Papers 8157, National Bureau of Economic Research, Inc.
- Joskow, P. & Edward Kahn, 2002. "A Quantitative Analysis of Pricing Behavior In California’s Wholesale Electricity Market During Summer 2000," Cambridge Working Papers in Economics 0211, Faculty of Economics, University of Cambridge.
- Willis, K. G. & Garrod, G. D., 1997. "Electricity supply reliability : Estimating the value of lost load," Energy Policy, Elsevier, vol. 25(1), pages 97-103, January.
- Newbery, D., 2002. "Regulatory Challenges to European Electricity Liberalisation," Cambridge Working Papers in Economics 0230, Faculty of Economics, University of Cambridge.
- Woo, Chi-Keung & Lloyd, Debra & Tishler, Asher, 2003. "Electricity market reform failures: UK, Norway, Alberta and California," Energy Policy, Elsevier, vol. 31(11), pages 1103-1115, September.
- Ford, Andrew, 1999. "Cycles in competitive electricity markets: a simulation study of the western United States," Energy Policy, Elsevier, vol. 27(11), pages 637-658, October.
- Littlechild, Stephen C, 2003. "Wholesale Spot Price Pass-Through," Journal of Regulatory Economics, Springer, vol. 23(1), pages 61-91, January.
- Palsson, Anne-Marie, 1996. "Does the degree of relative risk aversion vary with household characteristics?," Journal of Economic Psychology, Elsevier, vol. 17(6), pages 771-787, December.
- Turvey, R., 2003. "Ensuring adequate generation capacity," Utilities Policy, Elsevier, vol. 11(2), pages 95-102, June.
- Hirst, Eric & Hadley, Stan, 1999. "Generation Adequacy: Who Decides?," The Electricity Journal, Elsevier, vol. 12(8), pages 11-21, October.
- Hobbs, Benjamin F. & Iñón, Javier & Stoft, Steven E., 2001. "Installed Capacity Requirements and Price Caps: Oil on the Water, or Fuel on the Fire?," The Electricity Journal, Elsevier, vol. 14(6), pages 23-34, July.
- Shuttleworth, Graham, 1997. "Getting markets to clear," The Electricity Journal, Elsevier, vol. 10(3), pages 2-2, April.
- Fraser, Hamish & Lo Passo, Francesco, 2003. "Developing a Capacity Payment Mechanism in Italy," The Electricity Journal, Elsevier, vol. 16(9), pages 54-58, November.
- Anette Boom, 2003. "Investments in Electricity Generating Capacity under Different Market Structures and with Endogenously Fixed Demand," CIG Working Papers SP II 2003-01, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
- Besser, Janet Gail & Farr, John G. & Tierney, Susan F., 2002. "The Political Economy of Long-Term Generation Adequacy: Why an ICAP Mechanism is Needed as Part of Standard Market Design," The Electricity Journal, Elsevier, vol. 15(7), pages 53-62.
- Paul L. Joskow, 1976. "Contributions to the Theory of Marginal Cost Pricing," Bell Journal of Economics, The RAND Corporation, vol. 7(1), pages 197-206, Spring. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:eee:juipol:v:12:y:2004:i:4:p:253-267. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.