Capacity Choices in Liberalized Electricity Markets

33 Pages Posted: 30 Oct 2001

See all articles by Fidel Castro Rodríguez

Fidel Castro Rodríguez

University of Vigo

Pedro L. Marin

Universidad Carlos III de Madrid - Department of Economics; Centre for Economic Policy Research (CEPR)

Georges Siotis

Universidad Carlos III de Madrid - Department of Economics; Centre for Economic Policy Research (CEPR)

Date Written: October 2001

Abstract

We develop a theoretical model of long-run investment decisions on capacity in the context of a liberalized electricity market. The sector's idiosyncrasies such as the uncertainty surrounding future supply and demand, as well as technological constraints, are explicitly modelled. The model is sufficiently flexible to describe the situation in different systems. We derive the level of capacity that maximizes social welfare, and compare it to a decentralized outcome. We show that in the absence of any regulation, private investment decisions on capacity unambiguously lead to a socially sub-optimal outcome, and we illustrate these results using simulations.

Keywords: Electricity, capacity, long-run investment, regulation, liberalization

JEL Classification: L13, L43, L94

Suggested Citation

Castro Rodríguez, Fidel and Marin, Pedro L. and Siotis, Georges, Capacity Choices in Liberalized Electricity Markets (October 2001). Available at SSRN: https://ssrn.com/abstract=288359

Fidel Castro Rodríguez (Contact Author)

University of Vigo ( email )

Departamento de Fundamentos del Analisis Economico
E-36200 Vigo
Spain
+34 98 681 2526 (Phone)
+34 98 681 2401 (Fax)

Pedro L. Marin

Universidad Carlos III de Madrid - Department of Economics ( email )

Calle Madrid 126
Getafe, 28903
Spain
+34 91 624 9646 (Phone)
+34 91 624 9875 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Georges Siotis

Universidad Carlos III de Madrid - Department of Economics ( email )

Calle Madrid 126
Getafe, 28903
Spain
+34 91 624 9312 (Phone)
+34 91 624 9875 (Fax)

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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