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On investment decisions in liberalized electricity markets: the impact of price caps at the spot market

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  • ZOETTL, Gregor

Abstract

We analyze the impact of a uniform price cap at electricity spot markets on firms investment decisions and on welfare. Since investment decisions for those markets are taken in the long run, fluctuating demand at the spot market eventually gives rise to high price spikes in case of binding capacities. Those price spikes are considered to send accurate signals for investment in generation capacities, limiting those spikes by price caps is thought to reduce firms' investment incentives. We are able to show that this is not true for the case of strategic investment behavior. More specifically we analyze a market game where firms choose capacities prior to a spot market which is subject to fluctuating or uncertain demand. We derive, that appropriately chosen price caps do always increase firms investment incentives under imperfect competition. We furthermore characterize the optimal price cap. Based on the theoretical framework, we empirically analyze the impact of uniform price caps on the German electricity market.

Suggested Citation

  • ZOETTL, Gregor, 2008. "On investment decisions in liberalized electricity markets: the impact of price caps at the spot market," LIDAM Discussion Papers CORE 2008037, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    • Handle: RePEc:cor:louvco:2008037
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    Cited by:

    1. Sakellaris, Kostis, 2010. "Modeling Electricity Markets as Two-Stage Capacity Constrained Price Competition Games under Uncertainty," MPRA Paper 23317, University Library of Munich, Germany.
    2. Malte Sunderkötter, 2011. "Fuel mix characteristics and expected stock returns of European power companies," EWL Working Papers 11056, University of Duisburg-Essen, Chair for Management Science and Energy Economics, revised Oct 2011.
    3. Filomena, Tiago Pascoal & Campos-Náñez, Enrique & Duffey, Michael Robert, 2014. "Technology selection and capacity investment under uncertainty," European Journal of Operational Research, Elsevier, vol. 232(1), pages 125-136.

    More about this item

    Keywords

    Investment incentives; price caps; fluctuating demand; electricity markets;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • D41 - Microeconomics - - Market Structure, Pricing, and Design - - - Perfect Competition
    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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