Conventional Power Plants in Liberalized Electricity Markets with Renewable Entry

Gerard Llobet and Jorge Padilla ()
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Jorge Padilla: Compass Lexecon, http://www.compasslexecon.com

Working Papers from CEMFI

Abstract: This paper examines the optimal capacity choices of conventional power generators after the introduction of renewable production. We start with a basic and generally accepted model of the liberalized wholesale electricity market in which firms have insufficient incentives to invest and we illustrate how the entry of renewable generation tends to aggravate that problem. We show that the incentives to invest in firm capacity (e.g. conventional thermal plants) may be restored by means of a capacity auction mechanism. That mechanism is vulnerable and, hence, may prove ineffective unless governments can credibly commit not to sponsor the entry of new capacity outside the auction mechanism. We explain that such commitment may be particularly difficult in the current political context where energy policy is conditioned by environmental and industrial-policy goals. We finally propose a way to enhance the credibility of capacity auctions by committing to optimally retire idle (conventional) power plants in response to entry outside the auction.

Keywords: Conventional generation; renewable energy; security of supply; missing-money problem; environmental goals; capacity payments. (search for similar items in EconPapers)
JEL-codes: L51 L94 (search for similar items in EconPapers)
Date: 2018-01
New Economics Papers: this item is included in nep-com, nep-ene and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (22)

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Related works:
Journal Article: Conventional Power Plants in Liberalized Electricity Markets with Renewable Entry (2018)
Journal Article: Conventional Power Plants in Liberalized Electricity Marketswith Renewable Entry (2018)
Working Paper: Conventional Power Plants in Liberalized Electricity Markets with Renewable Entry (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:cmf:wpaper:wp2018_1801

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