Capacity Mechanisms and Effects on Market Structure

Christina Elberg and Sebastian Kranz
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Christina Elberg: Energiewirtschaftliches Institut an der Universitaet zu Koeln

No 2014-4, EWI Working Papers from Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI)

Abstract: Liberalized electricity markets are characterized by fluctuating price-inelastic demand of non-storable electricity, often defined by a substantial market share held by one or few incumbent firms. These characteristics have led to a controversial discussion concerning the need for and the design of capacity mechanisms, which combine some form of capacity payments with price caps in the spot market. The purpose of this study is to understand the effects of capacity mechanisms on the market structure. We consider a model with dominant firms and a competitive fringe and investigate the impact of price caps and capacity payments on investment incentives and market concentration. While lower price caps reduce the potential for the exercise of market power in static models, we find that in the dynamic model with endogenous investments, lower price caps result in an increase in market concentration, the frequency of capacity withholding and the profits of the dominant firms.

Keywords: Electricity Markets; Market Design; Market Structure; Capacity Mechanisms; Competitive Fringe (search for similar items in EconPapers)
JEL-codes: D47 L11 L51 L94 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2014-02-16
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Citations: View citations in EconPapers (3)

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Working Paper: Capacity Mechanisms and Effects on Market Structure (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:ris:ewikln:2014_004

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