Investment decisions in liberalized electricity markets: A framework of peak load pricing with strategic firms
In this article we analyze firms investment incentives in liberalized electricity markets. Since electricity is economically non storable, it is optimal for firms to invest in a differentiated portfolio of technologies in order to serve strongly fluctuating demand. Prior to the Liberalization of electricity markets, for regulated monopolists, optimal investment and pricing strategies haven been analyzed in the peak load pricing literature (compare Crew and Kleindorder (1986)). In restructured electricity markets regulated monopolistic generators have often been replaced by competing and potentially strategic firms. This article aims to respond to the changed reality and model investment decisions of strategic firms in those markets. We derive equilibrium investment for strategic firms and compare to the benchmark cases of perfect competition and monopoly outcomes. We find that strategic firms have an incentive to overinvest in base-load technologies but choose total capacities too low from a welfare point of view. By fitting the framework to a specific electricity market (Germany) we are able to empirically analyze Investment choices of strategic firms, and quantify the potential for market power and its impact on generation portfolios in restructured electricity markets in the long run.
|Date of creation:||01 Jul 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
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.:
- Joskow, Paul & Tirole, Jean, 2004.
"Reliability and Competitive Electricity Markets,"
IDEI Working Papers
310, Institut d'Économie Industrielle (IDEI), Toulouse.
- Joskow, P. & Tirole, J., 2004. "Reliability and Competitive Electricity Markets," Cambridge Working Papers in Economics 0450, Faculty of Economics, University of Cambridge.
- Paul Joskow & Jean Tirole, 2004. "Reliability and Competitive Electricity Markets," Working Papers 0408, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research.
- Paul L. Joskow & Jean Tirole, 2004. "Reliability and Competitive Electricity Markets," NBER Working Papers 10472, National Bureau of Economic Research, Inc.
- Joskow, Paul L & Tirole, Jean, 2007. "Reliability and Competitive Electricity Markets," CEPR Discussion Papers 6121, C.E.P.R. Discussion Papers.
- Klemperer, Paul D & Meyer, Margaret A, 1989. "Supply Function Equilibria in Oligopoly under Uncertainty," Econometrica, Econometric Society, vol. 57(6), pages 1243-77, November.
- Veronika Grimm & Gregor Zoettl, 2006. "Capacity Choice under Uncertainty: The Impact of Market Structure," Working Paper Series in Economics 23, University of Cologne, Department of Economics.
When requesting a correction, please mention this item's handle: RePEc:cor:louvco:2008041. 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.