Policy Uncertainty and Supply Adequacy in Electric Power Markets

Gert Brunekreeft

Oxford Review of Economic Policy, 2005, vol. 21, issue 1, 111-127

Abstract: This paper examines policy uncertainty adversely affecting investment in the electric power industry, covering generation and network assets. We focus on asymmetric, systematic, non-diversifiable risk with spin-offs. In generation, a key uncertainty is the inability of governments to refrain from intervention if capacity becomes scarce and prices rise. The policy expectations can, in fact, be self-fulfilling. One issue in network investment is that price-cap regulation is less suited to handling market risk than rate-of-return regulation. Another issue is the apparent inability of regulators credibly to commit to pre-announced policy. With increasing importance of new investment, a case can be made that (used-and-useful) rate-of-return regulation will regain territory in the future. Furthermore, improving checks and balances within the structure of regulation should be a focus of policy and good governance. Copyright 2005, Oxford University Press.

Date: 2005
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Persistent link: https://EconPapers.repec.org/RePEc:oup:oxford:v:21:y:2005:i:1:p:111-127

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