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Increasing the reliability of electricity production: a cost-benefit analysis

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  • Mark Lijesen

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Abstract

This report analyses three instruments aimed at increasing the reliability of electricity production. Read also the accompanying press release and Special Publication ' Energy policies and risks on energy markets; a cost-benefit analysis '. In the system of capacity markets, the transmission system operator (TSO) requires traders to back their own peak load plus a prescribed level of spare capacity with contracted capacity, the latter being tradable at secondary markets. With reserve contracts, the TSO contracts spare capacity from producers, holding it to be dispatched in case of a crisis. Capacity payments are a subsidy on capital costs, giving producers an incentive to build more capacity. These measures prove to be inefficient in preventing price spikes, as the welfare costs of price spikes are lower than the costs of the policy options unless price spikes occur in an implausibly high frequency. Capacity payments cannot prevent black-outs, as they do not induce enough investments in spare capacity. Black-outs can be prevented by capacity markets and reserve contracts, but at a high cost. Even if a 24-hour black-out of the Randstad area occurred every five years, it would be cheaper to accept the consequences of the black-out than to prevent it.

Suggested Citation

  • Mark Lijesen, 2004. "Increasing the reliability of electricity production: a cost-benefit analysis," CPB Document 52, CPB Netherlands Bureau for Economic Policy Analysis.
  • Handle: RePEc:cpb:docmnt:52
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    File URL: http://www.cpb.nl/sites/default/files/publicaties/download/increasing-reliability-electricity-production-cost-benefit-analysis.pdf
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    References listed on IDEAS

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    1. Tishler, Asher, 1993. "Optimal production with uncertain interruptions in the supply of electricity : Estimation of electricity outage costs," European Economic Review, Elsevier, pages 1259-1274.
    2. Klaus Moeltner & David F. Layton, 2002. "A Censored Random Coefficients Model For Pooled Survey Data With Application To The Estimation Of Power Outage Costs," The Review of Economics and Statistics, MIT Press, pages 552-561.
    3. Pablo Serra & Gabriel Fierro, 1996. "Outage Cost in Chilean Industry," Documentos de Trabajo 10, Centro de Economía Aplicada, Universidad de Chile.
    4. Richard Green, 2005. "Electricity and Markets," Oxford Review of Economic Policy, Oxford University Press, vol. 21(1), pages 67-87, Spring.
    5. Ford, Andrew, 1999. "Cycles in competitive electricity markets: a simulation study of the western United States," Energy Policy, Elsevier, pages 637-658.
    6. Machiel Mulder & S. Speck, 2003. "Competition on European energy markets: between policy ambitions and practical restrictions," CPB Document 33, CPB Netherlands Bureau for Economic Policy Analysis.
    7. Joskow, Paul L & Tirole, Jean, 1999. "Transmission Rights and Market Power on Electric Power Networks I: Financial Rights," CEPR Discussion Papers 2093, C.E.P.R. Discussion Papers.
    8. Serra, Pablo & Fierro, Gabriel, 1997. "Outage costs in Chilean industry," Energy Economics, Elsevier, pages 417-434.
    9. Jeroen de Joode & Douwe Kingma & Mark Lijesen, 2004. "Energy policies and risks on energy markets; a cost-benefit analysis," CPB Special Publication 51, CPB Netherlands Bureau for Economic Policy Analysis.
    10. Klaus Moeltner & David F. Layton, 2002. "A Censored Random Coefficients Model For Pooled Survey Data With Application To The Estimation Of Power Outage Costs," The Review of Economics and Statistics, MIT Press, pages 552-561.
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    Cited by:

    1. Arie ten Cate & Mark Lijesen, 2004. "The Elmar model: output and capacity in imperfectly competitive electricity markets," CPB Memorandum 94, CPB Netherlands Bureau for Economic Policy Analysis.

    More about this item

    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy

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