On investment decisions in liberalized electricity markets: the impact of price caps at the spot market

Gregor Zoettl

No 2008037, LIDAM Discussion Papers CORE from Université catholique de Louvain, Center for Operations Research and Econometrics (CORE)

Abstract: We analyze the impact of a uniform price cap at electricity spot markets on firms investment decisions and on welfare. Since investment decisions for those markets are taken in the long run, fluctuating demand at the spot market eventually gives rise to high price spikes in case of binding capacities. Those price spikes are considered to send accurate signals for investment in generation capacities, limiting those spikes by price caps is thought to reduce firms' investment incentives. We are able to show that this is not true for the case of strategic investment behavior. More specifically we analyze a market game where firms choose capacities prior to a spot market which is subject to fluctuating or uncertain demand. We derive, that appropriately chosen price caps do always increase firms investment incentives under imperfect competition. We furthermore characterize the optimal price cap. Based on the theoretical framework, we empirically analyze the impact of uniform price caps on the German electricity market.

Keywords: Investment incentives; price caps; fluctuating demand; electricity markets (search for similar items in EconPapers)
JEL-codes: D41 D42 D43 D81 L13 (search for similar items in EconPapers)
Date: 2008-06-01
New Economics Papers: this item is included in nep-ene and nep-mic
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Citations: View citations in EconPapers (3)

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Working Paper: On investment decisions in liberalized electricity markets: the impact of price caps at the spot market (2008)
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