On investment decisions in liberalized electricity markets: the impact of price caps at the spot market
We analyze the impact of a uniform price cap at electricity spot markets on firms investment decisions and on welfare. Since investment decisions for those markets are taken in the long run, fluctuating demand at the spot market eventually gives rise to high price spikes in case of binding capacities. Those price spikes are considered to send accurate signals for investment in generation capacities, limiting those spikes by price caps is thought to reduce firms' investment incentives. We are able to show that this is not true for the case of strategic investment behavior. More specifically we analyze a market game where firms choose capacities prior to a spot market which is subject to fluctuating or uncertain demand. We derive, that appropriately chosen price caps do always increase firms investment incentives under imperfect competition. We furthermore characterize the optimal price cap. Based on the theoretical framework, we empirically analyze the impact of uniform price caps on the German electricity market.
|Date of creation:||01 Jun 2008|
|Date of revision:|
|Contact details of provider:|| Postal: Voie du Roman Pays 34, 1348 Louvain-la-Neuve (Belgium)|
Fax: +32 10474304
Web page: http://www.uclouvain.be/core
More information through EDIRC
When requesting a correction, please mention this item's handle: RePEc:cor:louvco:2008037. 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: (Alain GILLIS)
If references are entirely missing, you can add them using this form.