The Visible Hand: Ensuring Optimal Investment in Electric Power Generation

Thomas-Olivier Léautier

No 10-153, TSE Working Papers from Toulouse School of Economics (TSE)

Abstract: This article formally analyzes the causes of underinvestment in electric power generation, and the various corrective market designs that have been proposed and implemented. It yields four main analytical findings. First, using a simple numerical example, (a linear demand function, calibrated on the French power load duration curve), strategic supply reduction is shown to be a more important cause of underinvestment than the imposition of a price cap. Second, physical capacity certificates markets implemented in the United States restore optimal investment, but increase producers' profits beyond the imperfect competition level. Third, financial reliability options, proposed in many markets, fail to restore investment incentives. If a "no short sale" condition is added, they are equivalent to physical capacity certificates. Finally, if competition is perfect, energy only markets yield a negligible underinvestment compared to the optimum. Taken together, these findings suggest that, to ensure generation adequacy, policy makers should put more effort on enforcing competitive behavior in the energy markets, and less on designing additional markets.

JEL-codes: L13 L94 (search for similar items in EconPapers)
Date: 2011-09, Revised 2012-08-19
New Economics Papers: this item is included in nep-ene, nep-ind and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: The Visible Hand: Ensuring Optimal Investment in Electric Power Generation (2016)
Working Paper: The Visible Hand: Ensuring Optimal Investment in Electric Power Generation (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:tse:wpaper:22641

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