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Welfare implications of capacity payments in a price-capped electricity sector: A case study of the Texas market (ERCOT)

Raúl Bajo-Buenestado ()

Energy Economics, 2017, vol. 64, issue C, 272-285

Abstract: The aim of this paper is to analyze the welfare consequences of introducing capacity compensation payments in restructured and liberalized electricity markets. For that purpose, we set up a two-stage framework in which two kinds of electricity generators, peak load and base load generators, choose their capacity investment levels first and then compete on the basis of bids in a centralized market to sell electricity to consumers. We use data from the Texas ERCOT to evaluate consumers' welfare. We find that the introduction of capacity payments has two countervailing effects. On the one hand, it increases the wholesale electricity price. On the other hand, it reduces price volatility and increases the reliability of the system. We find that capacity payments are more beneficial for consumers in a perfectly competitive market than in the presence of certain degree of market power.

Keywords: Capacity payments; Electricity market; Welfare analysis; Energy policy; Risk analysis (search for similar items in EconPapers)
JEL-codes: D24 D60 L94 Q41 Q48 (search for similar items in EconPapers)
Date: 2017
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