The Visible Hand: Ensuring Optimal Investment in Electric Power Generation
This article formally analyzes the causes of underinvestment in electric power generation, and the various corrective market designs that have been proposed and implemented. It yields four main analytical findings. First, using a simple numerical example, (a linear demand function, calibrated on the French power load duration curve), strategic supply reduction is shown to be a more important cause of underinvestment than the imposition of a price cap. Second, physical capacity certificates markets implemented in the United States restore optimal investment, but increase producers' profits beyond the imperfect competition level. Third, financial reliability options, proposed in many markets, fail to restore investment incentives. If a "no short sale" condition is added, they are equivalent to physical capacity certificates. Finally, if competition is perfect, energy only markets yield a negligible underinvestment compared to the optimum. Taken together, these findings suggest that, to ensure generation adequacy, policy makers should put more effort on enforcing competitive behavior in the energy markets, and less on designing additional markets.
|Date of creation:||Sep 2011|
|Date of revision:||19 Aug 2012|
|Publication status:||Published in The Energy Journal, vol. 37, n°2, 2016.|
|Contact details of provider:|| Phone: (+33) 5 61 12 86 23|
Web page: http://www.tse-fr.eu/
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.:
- Severin Borenstein & Stephen P. Holland, 2003.
"On the Efficiency of Competitive Electricity Markets With Time-Invariant Retail Prices,"
NBER Working Papers
9922, National Bureau of Economic Research, Inc.
- Severin Borenstein & Stephen Holland, 2005. "On the Efficiency of Competitive Electricity Markets with Time-Invariant Retail Prices," RAND Journal of Economics, The RAND Corporation, vol. 36(3), pages 469-493, Autumn.
- Chao, Hung-po & Wilson, Robert, 1987. "Priority Service: Pricing, Investment, and Market Organization," American Economic Review, American Economic Association, vol. 77(5), pages 899-916, December.
- Severin Borenstein, 2005. "The Long-Run Efficiency of Real-Time Electricity Pricing," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 93-116.
- Paul Joskow & Jean Tirole, 2004.
"Reliability and Competitive Electricity Markets,"
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.
- 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.
- Natalia Fabra & Nils‐Henrik M von der Fehr & María‐Ángeles de Frutos, 2011. "Market Design and Investment Incentives," Economic Journal, Royal Economic Society, vol. 121(557), pages 1340-1360, December.
- Michael A. Crew & Paul R. Kleindorfer, 1976. "Peak Load Pricing with a Diverse Technology," Bell Journal of Economics, The RAND Corporation, vol. 7(1), pages 207-231, Spring.
- Finon, Dominique & Pignon, Virginie, 2008. "Capacity mechanisms in imperfect electricity markets," Utilities Policy, Elsevier, vol. 16(3), pages 141-142, September.
- Lijesen, Mark G., 2007. "The real-time price elasticity of electricity," Energy Economics, Elsevier, vol. 29(2), pages 249-258, March.
- Peter Cramton & Steven Stoft, 2008.
"Forward Reliability Markets: Less Risk, Less Market Power, More Efficiency,"
Papers of Peter Cramton
08frm, University of Maryland, Department of Economics - Peter Cramton, revised 2008.
- Cramton, Peter & Stoft, Steven, 2008. "Forward reliability markets: Less risk, less market power, more efficiency," Utilities Policy, Elsevier, vol. 16(3), pages 194-201, September.
- Anette Boom, 2007.
"Vertically Integrated Firms' Investments in Electricity Generating Capacities,"
CIE Discussion Papers
2007-14, University of Copenhagen. Department of Economics. Centre for Industrial Economics.
- Boom, Anette, 2009. "Vertically integrated firms' investments in electricity generating capacities," International Journal of Industrial Organization, Elsevier, vol. 27(4), pages 544-551, July.
- D. Finon & V. Pignon, 2008. "Capacity mechanisms in imperfect electricity markets," Post-Print hal-00716763, HAL.
- Léautier, Thomas-Olivier, 2012.
"Is mandating "smart meters" smart?,"
IDEI Working Papers
747, Institut d'Économie Industrielle (IDEI), Toulouse.
- Zöttl, Gregor, 2011. "On optimal scarcity prices," International Journal of Industrial Organization, Elsevier, vol. 29(5), pages 589-605, September.
When requesting a correction, please mention this item's handle: RePEc:tse:wpaper:22641. 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: ()
If references are entirely missing, you can add them using this form.