Pricing and Capacity Provision in Electricity markets

An experimental approach

4 June 2009, from 15 pm to 17 pm

GIS LARSEN, Campus de Fontenay aux Roses

Speaker : C. Le Coq (Stockholm School of Economics)

Presentation :

Abstract : A key issue in the deregulation of the electricity sector is the creation of incentives for adequate investment in generation capacity while also fulfilling requirements on efficiency and low, non-volatile prices. Due to inelastic demand this is difficult to achieve and practitioners have come up with various and often dissimilar solutions. This paper analyzes whether physical electricity market provides the right incentives for the provision of the reserves needed to maintain system reliability, or whether some form of regulation is needed. It explores experimentally the relationships between capacity, competition and adequacy of supply in different regulatory settings. Three different regimes are considered: a “laisser-faire” option; a “Price cap” regulation regime; and a “Capacity market” regime, where subjects commit to provide capacity units before going on the market. It is shown that the capacity market regime performs better in terms of security supply than the alternatives regimes. The capacity market regime is however the worst in welfare terms. In this case prices do not work as a signal for investment but like a coordination device. Different market powers are isolated depending on the regime as well as the subjects (students or practitioners) that participate to the experiment.

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