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Investment decisions in liberalized electricity markets : A framework of peak load pricing with strategic firms

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  • Gregor, ZOETTL

Abstract

In this article we analyze firms investment incentives in liberalized electricity markets. Since electricity is economically non storable, it is optional 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 have 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 In restructured electricity markets regulated monopolistic generators have often been replaced by competing and potentially strategic firms.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 Investic choices of strategic firms, and quantifiy the potential for market power and its impact on generation portfolios in restructured electricity markets in the long run.

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  • Gregor, ZOETTL, 2008. "Investment decisions in liberalized electricity markets : A framework of peak load pricing with strategic firms," Discussion Papers (ECON - Département des Sciences Economiques) 2008029, Université catholique de Louvain, Département des Sciences Economiques.
  • Handle: RePEc:ctl:louvec:2008029
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    References listed on IDEAS

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    1. Paul Joskow & Jean Tirole, 2007. "Reliability and competitive electricity markets," RAND Journal of Economics, RAND Corporation, vol. 38(1), pages 60-84, March.
    2. Klemperer, Paul D & Meyer, Margaret A, 1989. "Supply Function Equilibria in Oligopoly under Uncertainty," Econometrica, Econometric Society, vol. 57(6), pages 1243-1277, November.
    3. 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.
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    Cited by:

    1. Sakellaris, Kostis, 2010. "Modeling Electricity Markets as Two-Stage Capacity Constrained Price Competition Games under Uncertainty," MPRA Paper 23317, University Library of Munich, Germany.
    2. Weigt, Hannes, 2009. "A Review of Liberalization and Modeling of Electricity Markets," MPRA Paper 65651, University Library of Munich, Germany.

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