Fred Schweppe meets Marcel Boiteux and Antoine-Augustin Cournot: transmission constraints and strategic underinvestment in electric power generation
This article examines imperfectly competitive investment in electric power generation in the presence of congestion on the transmission grid. Under simple yet realistic assumptions, it precisely derives the technology mix as a function of the capacity of the transmission interconnection. In particular, it finds that, if the interconnection is congested in one direction only, the cumulative capacity is not a¤ected by the congestion, while the baseload capacity is simply the uncongested baseload capacity, weighted by the size of its domestic market, plus the interconnection capacity. If the interconnection is successively congested in both directions, the peaking capacity is the cumulative uncongested capacity, weighted by the size its domestic market, plus the capacity of the interconnection, while the baseload capacity is the solution of a simple first-order condition. The marginal value of interconnection capacity is shown to generalize the expression obtained under perfect competition. It includes both a short-term component, that captures the reduction in marginal cost from substituting cheaper for more expensive power, but also a long-term component, that captures the change in installed capacity. Finally, increasing interconnection is shown to have an ambiguous impact on producers' profits. For example, if the interconnection is congested in one direction only, increasing capacity increases a monopolist profit. On the other hand, if the line is almost not congested, it reduces oligopolists' profits.
|Date of creation:||19 Sep 2013|
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- Joskow, Paul L & Tirole, Jean, 2007.
"Reliability and Competitive Electricity Markets,"
CEPR Discussion Papers
6121, C.E.P.R. Discussion Papers.
- Joskow, P. & Tirole, J., 2004. "Reliability and Competitive Electricity Markets," Cambridge Working Papers in Economics 0450, Faculty of Economics, University of Cambridge.
- Paul L. Joskow & Jean Tirole, 2004. "Reliability and Competitive Electricity Markets," NBER Working Papers 10472, National Bureau of Economic Research, Inc.
- Paul Joskow & Jean Tirole, 2004. "Reliability and Competitive Electricity Markets," Working Papers 0408, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research.
- Joskow, Paul & Tirole, Jean, 2004. "Reliability and Competitive Electricity Markets," IDEI Working Papers 310, Institut d'Économie Industrielle (IDEI), Toulouse.
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- Ruderer, D., 2012. "The Impact of Transmission Pricing in Network Industries," Cambridge Working Papers in Economics 1230, Faculty of Economics, University of Cambridge.
- Kathleen Spees & Samuel A. Newell & Johannes P. Pfeifenberger, 2013. "Capacity Markets - Lessons Learned from the First Decade," Economics of Energy & Environmental Policy, International Association for Energy Economics, vol. 0(Number 2).
- Paul L. Joskow, 2008. "Lessons Learned from Electricity Market Liberalization," The Energy Journal, International Association for Energy Economics, vol. 0(Special I), pages 9-42.
- 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.
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