Efficient Pricing of Electricity Revisited

58 Pages Posted: 8 Nov 2019 Last revised: 7 Sep 2021

See all articles by Mathias Mier

Mathias Mier

Ludwig Maximilian University of Munich (LMU) - ifo Institute (Leibniz Institute for Economic Research at the University of Munich)

Date Written: September 6, 2021

Abstract

Increasing shares of intermittent renewable energies challenge the dominant way to trade electricity ex-ante in forward, day-ahead, and intraday markets: Coal power plants and consumers cannot react to the stochastic element of renewables, whereas gas turbines can. We use a theoretical model to analyze behavior of final consumers and incentives of perfectly competitive firms to invest in different types of technologies under ex-ante pricing. Curtailed consumers need to get compensated in high of their disruption cost. Coal power firms recover cost. Renewables and gas turbine firms fail. We identify imperfections that arise from the delay in price setting and market clearing. Do real-time prices induce an efficient outcome? Consumers need to get taxed in high of rationing cost. Support is redundant for gas turbine firms, but renewables firms still fail to recover cost because the spatially distributed nature of renewables creates an output risk.

Keywords: efficient pricing, market design, capacity mechanisms, renewable energies, supply uncertainty, consumer behavior

JEL Classification: D41, D47, Q41, Q48, L94, L98

Suggested Citation

Mier, Mathias, Efficient Pricing of Electricity Revisited (September 6, 2021). Available at SSRN: https://ssrn.com/abstract=3477824 or http://dx.doi.org/10.2139/ssrn.3477824

Mathias Mier (Contact Author)

Ludwig Maximilian University of Munich (LMU) - ifo Institute (Leibniz Institute for Economic Research at the University of Munich) ( email )

Munich
Germany

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