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Capacity choices in liberalised electricity markets

Author

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  • Castro-Rodriguez, Fidel
  • Marín, Pedro L.
  • Siotis, Georges
Abstract
This paper addresses the issue of investment in electricity generation in the context of a liberalised market. We use the main results derived from a theoretical model where firms invest strategically to simulate the Spanish electricity system with real-world data. Our results indicate that, under reasonable parameter constellations regarding the number of agents, the level of capacity resulting from private decisions falls well short of the social optimum. Last, we show that two regulatory mechanisms that have been used to generate additional incentives for private agents to install capacity (capacity payment and price-adder) are ineffective and/or prohibitively costly.

Suggested Citation

  • Castro-Rodriguez, Fidel & Marín, Pedro L. & Siotis, Georges, 2009. "Capacity choices in liberalised electricity markets," Energy Policy, Elsevier, vol. 37(7), pages 2574-2581, July.
    • Handle: RePEc:eee:enepol:v:37:y:2009:i:7:p:2574-2581
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    1. Jean J. Gabszewicz & Sougata Poddar, 1997. "Demand fluctuations and capacity utilization under duopoly," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 10(1), pages 131-146.
    2. Veronika Grimm & Gregor Zoettl, 2006. "Capacity Choice under Uncertainty: The Impact of Market Structure," Working Paper Series in Economics 23, University of Cologne, Department of Economics.
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    Cited by:

    1. Lachman, Daniël A., 2011. "Leapfrog to the future: Energy scenarios and strategies for Suriname to 2050," Energy Policy, Elsevier, vol. 39(9), pages 5035-5044, September.
    2. Aitor Ciarreta & María Espinosa, 2010. "Market power in the Spanish electricity auction," Journal of Regulatory Economics, Springer, vol. 37(1), pages 42-69, February.
    3. Lízal, Lubomír M. & Tashpulatov, Sherzod N., 2014. "Do producers apply a capacity cutting strategy to increase prices? The case of the England and Wales electricity market," Energy Economics, Elsevier, vol. 43(C), pages 114-124.
    4. John FitzGerald, 2002. "The Irish Energy Market - Putting the Customer First," Papers WP145, Economic and Social Research Institute (ESRI).
    5. Boom, Anette & Buehler, Stefan, 2014. "Restructuring the Electricity Industry: Vertical Structure and the Risk of Rent Extraction," Working Papers 02-2014, Copenhagen Business School, Department of Economics.
    6. Anette Boom & Stefan Buehler, 2020. "Vertical structure and the risk of rent extraction in the electricity industry," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 29(1), pages 210-237, January.
    7. S. Brakman & J.G.M. van Marrewijk & A. van Witteloostuijn, 2009. "Market liberalization in the European Natural Gas Market: The importance of capacity constraints and efficiency differences," Working Papers 09-15, Utrecht School of Economics.
    8. Sherzod N. Tashpulatov, 2018. "The Impact of Behavioral and Structural Remedies on Electricity Prices: The Case of the England and Wales Electricity Market," Energies, MDPI, vol. 11(12), pages 1-24, December.
    9. Perez, Eloy, 2007. "A model of vertical integration and investment in generation capacity in electricity markets: The case of the bidding game," Socio-Economic Planning Sciences, Elsevier, vol. 41(4), pages 272-290, December.
    10. Anette Boom, "undated". "Investments in Electricity Generation Capacity under Different Market Structures with Price Responsive Demand," Papers 016, Departmental Working Papers.
    11. Moreno, Fermín & Martínez-Val, José M., 2011. "Collateral effects of renewable energies deployment in Spain: Impact on thermal power plants performance and management," Energy Policy, Elsevier, vol. 39(10), pages 6561-6574, October.
    12. Boom, Anette, 2009. "Vertically integrated firms' investments in electricity generating capacities," International Journal of Industrial Organization, Elsevier, vol. 27(4), pages 544-551, July.
    13. Foster, John & Wagner, Liam & Liebman, Ariel, 2015. "Modelling the Electricity and Natural Gas Sectors for the Future Grid: Developing Co-Optimisation Platforms for Market Redesign," MPRA Paper 70114, University Library of Munich, Germany.
    14. Sherzod Tashpulatov & Lubomir Lizal, 2012. "Can Producers Apply a Capacity Cutting Strategy to Increase Prices? The Case of the England and Wales Electricity Market," CERGE-EI Working Papers wp465, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    15. Sam Aflaki & Serguei Netessine, 2017. "Strategic Investment in Renewable Energy Sources: The Effect of Supply Intermittency," Manufacturing & Service Operations Management, INFORMS, vol. 19(3), pages 489-507, July.
    16. Tsybina, Eve & Moreno-Cruz, Juan & Tereshin, Alexey, 2019. "Liberalisation lowers primary energy efficiency: Evidence from twin power systems," Energy, Elsevier, vol. 173(C), pages 423-435.
    17. Zapata, Sebastian & Castaneda, Monica & Franco, Carlos Jaime & Dyner, Isaac, 2019. "Clean and secure power supply: A system dynamics based appraisal," Energy Policy, Elsevier, vol. 131(C), pages 9-21.
    18. Anette Boom & Stefan Buehler, 2007. "Restructuring Electricity Markets when Demand is Uncertain: Effects on Capacity Investments, Prices and Welfare," CIE Discussion Papers 2007-09, University of Copenhagen. Department of Economics. Centre for Industrial Economics.
    19. Aitor Ciarreta & María Paz Espinosa, 2006. "Demand Elasticity and Market Power in the Spanish Electricity Market," Working Papers 0606, Departament Empresa, Universitat Autònoma de Barcelona, revised Jun 2006.
    20. Aitor Ciarreta & María Espinosa, 2010. "Market power in the Spanish electricity auction," Journal of Regulatory Economics, Springer, vol. 37(1), pages 42-69, February.
    21. Serra, Pablo, 2013. "Contract market power and its impact on the efficiency of the electricity sector," Energy Policy, Elsevier, vol. 61(C), pages 653-662.
    22. Arellano, Maria-Soledad & Serra, Pablo, 2007. "A model of market power in electricity industries subject to peak load pricing," Energy Policy, Elsevier, vol. 35(10), pages 5130-5135, October.

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    More about this item

    Keywords

    Electricity Capacity Long-run investment;

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L43 - Industrial Organization - - Antitrust Issues and Policies - - - Legal Monopolies and Regulation or Deregulation
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities

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