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The role of expectations for market design – on structural regulatory uncertainty in electricity markets

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  • Ambrosius, M.
  • Egerer, J.
  • Grimm, V.
  • van der Weijde, A.

Abstract

Ongoing policy discussions on the reconfiguration of bidding zones in European electricity markets induce structural uncertainty about the future market design. This paper deals with the question of how this structural uncertainty affects market participants and their long-run investment decisions in generation and transmission capacity. We propose a stochastic multilevel model, which incorporates generation capacity investment, network expansion and redispatch, taking into account uncertainty about the future market design. Using a stylized two-node network, we disentangle different effects that uncertainty has on market outcomes. Our results reveal that expectations about future market structures have an important effect on investment decisions. Unlike most parametric uncertainties, structural uncertainty about the future market design can have a positive effect on welfare, even if a market design change does not actually take place, although there are distributional effects. This also implies that the welfare gains of a change to a more efficient market design are lower if market participants already anticipate this change.

Suggested Citation

  • Ambrosius, M. & Egerer, J. & Grimm, V. & van der Weijde, A., 2019. "The role of expectations for market design – on structural regulatory uncertainty in electricity markets," Cambridge Working Papers in Economics 1943, Faculty of Economics, University of Cambridge.
  • Handle: RePEc:cam:camdae:1943
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    Cited by:

    1. Anselm Eicke, Tarun Khanna, and Lion Hirth, 2020. "Locational Investment Signals: How to Steer the Siting of New Generation Capacity in Power Systems?," The Energy Journal, International Association for Energy Economics, vol. 0(Number 6), pages 281-304.
    2. Gatzert, Nadine & Martin, Alexander & Schmidt, Martin & Seith, Benjamin & Vogl, Nikolai, 2021. "Portfolio optimization with irreversible long-term investments in renewable energy under policy risk: A mixed-integer multistage stochastic model and a moving-horizon approach," European Journal of Operational Research, Elsevier, vol. 290(2), pages 734-748.

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    More about this item

    Keywords

    Electricity; investment; structural uncertainty; market design; bidding zones; nodal pricing;
    All these keywords.

    JEL classification:

    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy

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