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Investment decisions in liberalized electricity markets: A framework of peak load pricing with strategic firms

Gregor Zoettl

No 2008041, LIDAM Discussion Papers CORE from Université catholique de Louvain, Center for Operations Research and Econometrics (CORE)

Abstract: In this article we analyze firms investment incentives in liberalized electricity markets. Since electricity is economically non storable, it is optimal for firms to invest in a differentiated portfolio of technologies in order to serve strongly fluctuating demand. Prior to the Liberalization of electricity markets, for regulated monopolists, optimal investment and pricing strategies haven been analyzed in the peak load pricing literature (compare Crew and Kleindorder (1986)). In restructured electricity markets regulated monopolistic generators have often been replaced by competing and potentially strategic firms. This article aims to respond to the changed reality and model investment decisions of strategic firms in those markets. We derive equilibrium investment for strategic firms and compare to the benchmark cases of perfect competition and monopoly outcomes. We find that strategic firms have an incentive to overinvest in base-load technologies but choose total capacities too low from a welfare point of view. By fitting the framework to a specific electricity market (Germany) we are able to empirically analyze Investment choices of strategic firms, and quantify the potential for market power and its impact on generation portfolios in restructured electricity markets in the long run.

Keywords: Investment decisions; technology choice; restructured electricity markets; peak load pricing; strategic firms. (search for similar items in EconPapers)
Date: 2008-07-01
New Economics Papers: this item is included in nep-cse, nep-ene and nep-mic
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Citations: View citations in EconPapers (4)

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Working Paper: Investment decisions in liberalized electricity markets: A framework of peak load pricing with strategic firms (2008) Downloads
Working Paper: Investment decisions in Liberalized Electricity Markets: A framework of Peak Load Pricing with strategic firms (2008) Downloads
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