Cost Recovery and Investment Incentives in Electricity Markets

12 Pages Posted: 7 Dec 2006

See all articles by Julio E. Villarreal

Julio E. Villarreal

Universidad de los Andes, Colombia

Oscar Javier Martinez

University of the Andes (Colombia)

Date Written: November 2006

Abstract

Given the characteristics of electricity and the reforms that this sector has undergone, there is still a lot of discussion regarding the best way of ensuring adequate supply in such an environment. The situation is even more critical for countries like Colombia with high dependence on hydro resources and susceptibility to drastic climatic events typical of the region. This paper analyses how generators recover their costs in competitive electricity markets, how the necessary incentives are set and the different ways in which the regulator can ensure generation adequacy. Among these are market derivatives as well as administrative mechanisms. As it will be shown, a market mechanism is capable of ensuring the necessary reliability at an efficient price.

Keywords: Market power, call options, capacity payment and market instruments

JEL Classification: D21, D24, D41, D49, D52, H42, L51, L94

Suggested Citation

Villarreal, Julio E. and Martinez, Oscar Javier, Cost Recovery and Investment Incentives in Electricity Markets (November 2006). Available at SSRN: https://ssrn.com/abstract=949915 or http://dx.doi.org/10.2139/ssrn.949915

Julio E. Villarreal

Universidad de los Andes, Colombia ( email )

Carrera Primera # 18A-12
Bogota, DC D.C. 110311
Colombia

Oscar Javier Martinez (Contact Author)

University of the Andes (Colombia) ( email )

Carrera Primera # 18A-12
Bogota, DC D.C. 110311
Colombia

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