IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this paper

An Evolutionary Analysis of Investment in Electricity Markets

Listed author(s):
  • Manuel L. Costa
  • Fernando S. Oliveira


    (Operational Research and Systems Warwick Business School)

Registered author(s):

    Electricity markets are being liberalised and open to private competition in several countries. These liberalized electricity markets are very complex as the interactions between demand and supply are subject to several technicalities arising from the commodity being traded: electricity. One of these technicalities is that generators cannot store electricity: this fact implies that it needs to generate its production real-time. A second problem with this market are the different generation technologies used at different levels of demand, which implies that at different times of the day different generation costs are supported to meet demand: due to ramp-rate constraints, capacity available, and fixed and start-up costs. In this paper we analyze the issue of investment and the electricity system’s long-term security in an industry where a regulator controls the short-term prices, imposing a perfect competition outcome for “low†demand hours and a price cap at times where load is shed. We look at the following research questions: a) How does the oligopolistic structure of the market interact with the value of the different technologies? b) How do players define their investment strategies? c) How do the regulatory policies affect the investment in generation? Do they work similarly under perfect competition and oligopoly? d) Can markets invest enough capacity to ensure the long run security of the market? The main results of our analysis are following: 1. The impact of a given investment on the market price is independent of the player investing. 2. The impact of an investment on price is a function of the technology in which the investment takes place and of the cycle to which the price refers to. 3. The impact of price caps on the evolution of the market structure is non-linear, it cannot be too low or too high. 4. An oligopolistic electricity market fails to deliver the needed investment unless the regulators intervene. 5. The higher the reserve margin the higher the total investment. However, this instrument by itself was not able to provide the incentive needed to ensure the long-term security of the system, as in any of the experiments analyzed the peak demand is not completely satisfied. 6. Even a slight increase in demand, due to the reserve margin, leads to important changes on the relative value of the different technologies. 7. The main task of the regulatory authorities is to define a level of capacity payments that give the necessary incentive to investment, at the minimum cost: Capacity Payments are very important in shaping the generation structure. 8. Uncertainty reduces the value of Peak plants: this result clearly contradicts any common sense in these matters, as one would expect the presence of price uncertainty to be beneficial to Peak plants. The proportion invested in baseload plants increases with uncertainty of the energy price, decreasing the investment in shoulder plant.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL:
    Download Restriction: no

    Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2005 with number 430.

    in new window

    Date of creation: 11 Nov 2005
    Handle: RePEc:sce:scecf5:430
    Contact details of provider: Web page:

    More information through EDIRC

    References listed on IDEAS
    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.:

    in new window

    1. Bower, John & Bunn, Derek, 2001. "Experimental analysis of the efficiency of uniform-price versus discriminatory auctions in the England and Wales electricity market," Journal of Economic Dynamics and Control, Elsevier, vol. 25(3-4), pages 561-592, March.
    2. James Nicolaisen & Valentin Petrov & Leigh Tesfatsion, 2000. "Market Power and Efficiency in a Computational Electricity Market with Discriminatory Double-Auction Pricing," Computational Economics 0004005, EconWPA.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:sce:scecf5:430. 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: (Christopher F. Baum)

    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.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.