Insufficient Incentives for Investment in Electricity Generation
Karsten Neuhoff () and
Laurens de Vries
Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge
In theory, competitive electricity markets can provide incentives for efficient investment in generating capacity. We show that if consumers and investors are risk averse, investment is efficient only if investors in generating capacity can sign long-term contracts with consumers. Otherwise the uncovered price risk increases financing costs, reduces equilibrium investment levels, distorts technology choice towards less capital-intensive generation and reduces consumer utility. We observe insufficient levels of long-term contracts in existing markets, possibly because retail companies are not credible counter-parties if their final customer can switch easily. With consumer franchise, retailers can sign long-term contracts, but this solution comes at the expense of the idea of retail competition. Alternative capacity mechanisms to stimulate investment are discussed.
Keywords: investment; electricity; consumer utility; long-term contracts (search for similar items in EconPapers)
JEL-codes: D11 D40 D52 L94 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-com
Note: CMI42, IO
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (39) Track citations by RSS feed
Downloads: (external link)
Our link check indicates that this URL is bad, the error code is: 404 Not Found
Journal Article: Insufficient incentives for investment in electricity generations (2004)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:cam:camdae:0428
Access Statistics for this paper
More papers in Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge
Bibliographic data for series maintained by Jake Dyer (). This e-mail address is bad, please contact .