Journal of Regulatory Economics

, Volume 51, Issue 2, pp 123–158 | Cite as

Pricing and capacity provision in electricity markets: an experimental study

Original Article

Abstract

The creation of adequate investment incentives has been of great concern in the restructuring of the electricity sector. However, to achieve this, regulators have applied different market designs across countries and regions. In this paper we employ laboratory methods to explore the relationship between market design, capacity provision and pricing in electricity markets. Subjects act as firms, choosing their generation capacity and competing in uniform price auction markets. We compare three regulatory designs: (1) a baseline price cap system that restricts scarcity rents, (2) a price spike regime that effectively lifts these restrictions, and (3) a capacity market that directly rewards the provision of capacity. Restricting price spikes leads to underinvestment. In line with the regulatory intention both alternative designs lead to sufficient investment albeit at the cost of higher energy prices during peak periods and substantial capacity payments in the capacity market regime. To some extent these results confirm theoretical expectations. However, we also find lower than predicted spot market prices as sellers compete relatively intensely in capacities and prices, and the capacity markets are less competitive than predicted.

Keywords

Price caps Electricity Supply function competition Auctions 

JEL Classification

C91 L13 L94 

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Copyright information

© Springer Science+Business Media New York 2017

Authors and Affiliations

  • Chloé Le Coq
    • 1
  • Henrik Orzen
    • 2
  • Sebastian Schwenen
    • 3
    • 4
  1. 1.Stockholm School of EconomicsSITEStockholmSweden
  2. 2.Department of EconomicsUniversity of MannheimMannheimGermany
  3. 3.School of ManagementTechnical University of MunichMunichGermany
  4. 4.German Institute for Economic Research DIWBerlinGermany

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