IDEAS home Printed from https://ideas.repec.org/p/vuw/vuwcsr/3859.html
   My bibliography  Save this paper

Electricity Investment and Security of Supply in Liberalized Electricity Systems

Author

Listed:
  • Meade, Richard

Abstract

Eliciting generation investment by decentralized profit-seeking private investors is a key goal of electricity liberalization. Debate rages regarding the ability of energy-only electricity markets to ensure that such investors provide generation investment as and when needed to ensure "the lights stay on."Many argue that despite theoretical predictions to the contrary energy-only markets will under-provide the requisite level of investment due to market imperfections that are either inherent (such as consumer resistance to real-time pricing) or imposed (such as price caps to curtail market power). Thenature of these imperfections is increasingly being debated with security of supply formerly being regarded as a public good but later analysis showing this is not the case (or even if it were why that need not necessitate intervention). Greater attention is now being paid to externalities associated with the provision of security of supply but evidence on the importance of such externalities is yet to be presented. Similarly lacking is evidence on the superiority of mechanisms often proposed or implemented to encourage investment in generation capacity where energy-only markets are thoughtto elicit inadequate investment. These mechanisms include capacity payments capacity obligations options-based capacity schemes and capacity subscriptions with load-limiting fuses. While the latter are argued to represent an elegant and non-distortionary means to encourage market-based securityof supply the other alternatives are shown to be conditionally optimal at best and in principle and practice subject to self-defeating features that can be bettered by refinements to energy-only market arrangements (greater demand-side responsiveness) and structural measures (vertical integration ofgeneration and energy retailing). By instead pursuing these alternative measures security of supply is more easily achieved electricity prices are less vulnerable to exploitation of generator market power and generation investment is more likely to arise. The need for price caps which then necessitate compensatory capacity mechanisms to elicit investment is then reduced. At the same time exposure to regulatory risk is lessened. Combining these measures with greater political and regulatory restraint is argued to provide a more stable and superior means to elicit the investment needed to provide the socially optimal security of supply addressing any market imperfections at source rather than introducing new mechanisms at least as much at risk of imperfection. The use of capacity mechanisms is argued to increase the risk that energy-only markets will fail to perform as expectedand required undermining the liberalisation process. As such they raise the prospect that governments and regulators concerned about security of supply will once again find themselves responsible for achieving it at consumers' and/or taxpayers' expense but with lesser prospect of success.

Suggested Citation

  • Meade, Richard, 2005. "Electricity Investment and Security of Supply in Liberalized Electricity Systems," Working Paper Series 3859, Victoria University of Wellington, The New Zealand Institute for the Study of Competition and Regulation.
  • Handle: RePEc:vuw:vuwcsr:3859
    as

    Download full text from publisher

    File URL: http://researcharchive.vuw.ac.nz/handle/10063/3859
    Download Restriction: no

    References listed on IDEAS

    as
    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. Rochlin, Cliff, 2004. "Resource Adequacy Requirement, Reserve Margin, and the Public Goods Argument," The Electricity Journal, Elsevier, vol. 17(3), pages 52-59, April.
    3. George J. Stigler, 1971. "The Theory of Economic Regulation," Bell Journal of Economics, The RAND Corporation, vol. 2(1), pages 3-21, Spring.
    4. Roques, F. & Newbery, D.M. & Nuttall, W.J., 2004. "Generation Adequacy and Investment Incentives in Britain: from the Pool to NETA," Cambridge Working Papers in Economics 0459, Faculty of Economics, University of Cambridge.
    5. Buehler, Stefan & Schmutzler, Armin & Benz, Men-Andri, 2004. "Infrastructure quality in deregulated industries: is there an underinvestment problem?," International Journal of Industrial Organization, Elsevier, vol. 22(2), pages 253-267, February.
    6. Jean-Jacques Laffont & Jean Tirole, 1991. "The Politics of Government Decision-Making: A Theory of Regulatory Capture," The Quarterly Journal of Economics, Oxford University Press, vol. 106(4), pages 1089-1127.
    7. Hung-po Chao, 1983. "Peak Load Pricing and Capacity Planning with Demand and Supply Uncertainty," Bell Journal of Economics, The RAND Corporation, vol. 14(1), pages 179-190, Spring.
    8. Elinor Ostrom, 2000. "Collective Action and the Evolution of Social Norms," Journal of Economic Perspectives, American Economic Association, vol. 14(3), pages 137-158, Summer.
    9. Helm, Dieter, 1994. "British Utility Regulation: Theory, Practice, and Reform," Oxford Review of Economic Policy, Oxford University Press, vol. 10(3), pages 17-39, Autumn.
    10. Paul L. Joskow, 1976. "Contributions to the Theory of Marginal Cost Pricing," Bell Journal of Economics, The RAND Corporation, vol. 7(1), pages 197-206, Spring.
    11. Coase, R H, 1974. "The Lighthouse in Economics," Journal of Law and Economics, University of Chicago Press, vol. 17(2), pages 357-376, October.
    12. 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.
    13. John P. Small, 1999. "The Timing and Scale of Investment Under Uncertainty," Econometrics Working Papers 9906, Department of Economics, University of Victoria.
    14. Athey, Susan & Schmutzler, Armin, 2001. "Investment and Market Dominance," RAND Journal of Economics, The RAND Corporation, vol. 32(1), pages 1-26, Spring.
    15. Teece, David J., 1980. "Economies of scope and the scope of the enterprise," Journal of Economic Behavior & Organization, Elsevier, vol. 1(3), pages 223-247, September.
    16. Hobbs, Benjamin F. & Iñón, Javier & Stoft, Steven E., 2001. "Installed Capacity Requirements and Price Caps: Oil on the Water, or Fuel on the Fire?," The Electricity Journal, Elsevier, vol. 14(6), pages 23-34, July.
    17. Severin Borenstein, 2002. "The Trouble With Electricity Markets: Understanding California's Restructuring Disaster," Journal of Economic Perspectives, American Economic Association, vol. 16(1), pages 191-211, Winter.
    18. Erin T. Mansur, 2003. "Vertical Integration in Restructured Electricity Markets: Measuring Market Efficiency and Firm Conduct," Yale School of Management Working Papers ysm430, Yale School of Management.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. repec:eee:eneeco:v:67:y:2017:i:c:p:355-365 is not listed on IDEAS

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:vuw:vuwcsr:3859. 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: (Library Technology Services). General contact details of provider: http://edirc.repec.org/data/fcvuwnz.html .

    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 CitEc recognized a reference but did not link an item in RePEc 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 RePEc Author Service 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.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.