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: |
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 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.