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Generation Adequacy and Investment Incentives in Britain: from the Pool to NETA

  • Roques, F.
  • Newbery, D.M.
  • Nuttall, W.J.

Three years after the controversial change of the British market design from compulsory Pool with capacity payments to decentralised energy-only New Electricity Trading Arrangements (NETA) market framework, we compare the two designs in terms of investment incentives. We review the biases of the Pool capacity payments design, the drought of investment following the introduction of NETA, and the reaction of the market during the first “stress-test” of NETA during the winter 2003. In an energy-only market such as NETA, it is essential that price signals are right and the system operator has a crucial role in contracting ahead for reserve. We recommend that NETA adopt a single marginal imbalance price as dual imbalance pricing distorts price signals in times of scarcity. The lack of long-term contracting that causes hedging and financing difficulties for power projects can be compensated by vertical and horizontal reintegration at a cost of increased market power.

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Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 0459.

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Length: 51
Date of creation: Oct 2004
Date of revision:
Handle: RePEc:cam:camdae:0459
Note: CMI, IO
Contact details of provider: Web page: http://www.econ.cam.ac.uk/index.htm

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