The Generation Mix, Price Caps and Capacity Markets

16 Pages Posted: 15 Jul 2014 Last revised: 17 Jul 2014

See all articles by Bert Willems

Bert Willems

UCLouvain - LIDAM / CORE; Tilburg University - Department of Economics - CentER & TILEC; University of Toulouse 1 - Toulouse School of Economics (TSE)

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

Willems, Bert, The Generation Mix, Price Caps and Capacity Markets (July 1, 2014). TILEC Discussion Paper No. 2014-026, Available at SSRN: https://ssrn.com/abstract=2466266 or http://dx.doi.org/10.2139/ssrn.2466266

Bert Willems (Contact Author)

UCLouvain - LIDAM / CORE ( email )

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Tilburg University - Department of Economics - CentER & TILEC ( email )

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University of Toulouse 1 - Toulouse School of Economics (TSE) ( email )

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