The Generation Mix, Price Caps and Capacity Markets
16 Pages Posted: 15 Jul 2014 Last revised: 17 Jul 2014
Date Written: July 1, 2014
Abstract
This paper derives the optimal mix of generation technologies in the electricity sector and discusses how this mix will be achieved in a perfectly competitive electricity market. It then studies the detrimental effect of a price cap on short-term profitability and long-run investment incentives of producers, and shows how a technology-neutral capacity mechanism can restore the efficient generation mix. Intermittent wind production or active consumer participation do not fundamentally affect this analysis.
Keywords: electricity markes, capacity mechanisms, internal energy market
JEL Classification: Q41, L11
Suggested Citation: Suggested Citation