Insufficient Incentives for Investment in Electricity Generation
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Authors
Neuhoff, Karsten
de Vries, Laurens
Publication Date
2004-06-16Series
Cambridge Working Papers in Economics
Publisher
Faculty of Economics
Language
en_GB
Type
Working Paper
Metadata
Show full item recordCitation
Neuhoff, K., & de Vries, L. (2004). Insufficient Incentives for Investment in Electricity Generation. https://doi.org/10.17863/CAM.5405
Abstract
In theory, competitive electricity markets can provide incentives for efficient investment in generating capacity. We show that if consumers and investors are risk averse, investment is efficient only if investors in generating capacity can sign long-term contracts with consumers. Otherwise the uncovered price risk increases financing costs, reduces equilibrium investment levels, distorts technology choice towards less capital-intensive generation and reduces consumer utility. We observe insufficient levels of long-term contracts in existing markets, possibly because retail companies are not credible counter-parties if their final customer can switch easily. With consumer franchise, retailers can sign long-term contracts, but this solution comes at the expense of the idea of retail competition. Alternative capacity mechanisms to stimulate investment are discussed.
Keywords
investment, electricity, consumer utility, long-term contracts
Identifiers
This record's DOI: https://doi.org/10.17863/CAM.5405
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