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The Question of Generation Adequacy in Liberalised Electricity Markets

  • L.J. de Vries

    (Delft University of Technology)

  • R.A. Hakvoort

    (Delft University of Technology)

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    This paper presents an overview of the reasons why unregulated markets for the production of electricity cannot be expected to invest sufficiently in generation capacity on a continuous basis. Although it can be shown that periodic price spikes should provide generation companies with sufficient investment incentives in theory, there are a number of probable causes of market failure. A likely result is the development of investment cycles that may affect the adequacy of capacity. The experience in California shows the great social costs associated with an episode of scarce generation capacity. Another disadvantage is that generation companies can manipulate price spikes. This would result in large transfers of income from consumers to producers and reduce the operational reliability of electricity supply during these price spikes. We end this paper by outlining several methods that have been proposed to stabilise the market, which provide better incentives to generation companies and consumers alike.

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    Paper provided by Fondazione Eni Enrico Mattei in its series Working Papers with number 2004.120.

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    Date of creation: Sep 2004
    Date of revision:
    Handle: RePEc:fem:femwpa:2004.120
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    1. Shuttleworth, Graham, 1997. "Getting markets to clear," The Electricity Journal, Elsevier, vol. 10(3), pages 2-2, April.
    2. Hirst, Eric, 2000. "Do We Need More Transmission Capacity?," The Electricity Journal, Elsevier, vol. 13(9), pages 78-89, November.
    3. Newbery, D., 2002. "Regulatory Challenges to European Electricity Liberalisation," Cambridge Working Papers in Economics 0230, Faculty of Economics, University of Cambridge.
    4. Ford, Andrew, 1999. "Cycles in competitive electricity markets: a simulation study of the western United States," Energy Policy, Elsevier, vol. 27(11), pages 637-658, October.
    5. Besser, Janet Gail & Farr, John G. & Tierney, Susan F., 2002. "The Political Economy of Long-Term Generation Adequacy: Why an ICAP Mechanism is Needed as Part of Standard Market Design," The Electricity Journal, Elsevier, vol. 15(7), pages 53-62.
    6. Hirst, Eric & Hadley, Stan, 1999. "Generation Adequacy: Who Decides?," The Electricity Journal, Elsevier, vol. 12(8), pages 11-21, October.
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