The Question of Generation Adequacy in Liberalised Electricity Markets

L.J. de Vries and R.A. Hakvoort
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L.J. de Vries: Delft University of Technology
R.A. Hakvoort: Delft University of Technology

No 2004.120, Working Papers from Fondazione Eni Enrico Mattei

Abstract: This paper presents an overview of the reasons why unregulated markets for the production of electricity cannot be expected to invest sufficiently in generation capacity on a continuous basis. Although it can be shown that periodic price spikes should provide generation companies with sufficient investment incentives in theory, there are a number of probable causes of market failure. A likely result is the development of investment cycles that may affect the adequacy of capacity. The experience in California shows the great social costs associated with an episode of scarce generation capacity. Another disadvantage is that generation companies can manipulate price spikes. This would result in large transfers of income from consumers to producers and reduce the operational reliability of electricity supply during these price spikes. We end this paper by outlining several methods that have been proposed to stabilise the market, which provide better incentives to generation companies and consumers alike.

Keywords: Generation adequacy; Liberalised electricity market (search for similar items in EconPapers)
JEL-codes: Q41 Q43 (search for similar items in EconPapers)
Date: 2004-09
New Economics Papers: this item is included in nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (18)

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Persistent link: https://EconPapers.repec.org/RePEc:fem:femwpa:2004.120

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