Reliability and Competitive Electricity Markets

42 Pages Posted: 16 May 2008

See all articles by Paul L. Joskow

Paul L. Joskow

Alfred P. Sloan Foundation; Massachusetts Institute of Technology (MIT) - Department of Economics

Jean Tirole

University of Toulouse 1 - Industrial Economic Institute (IDEI); University of Toulouse 1 - Groupe de Recherche en Economie Mathématique et Quantitative (GREMAQ); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

Date Written: February 2007

Abstract

This paper seeks to bridge the gap between economists focused on designing competitive market mechanisms and engineers focused on the physical attributes and engineering requirements they perceive as being needed for operating a reliable electric power system. The paper starts by deriving the (second-best) optimal prices and investment program when there are price-insensitive retail consumers, but when their load serving entities can choose any level of rationing they prefer contingent on real time prices. It then examines the assumptions required for a competitive wholesale and retail market to achieve this optimal price and investment program. The paper analyses the implications of relaxing several of these assumptions. First, it analyzes the interrelationships between regulator-imposed price caps and capacity obligations. It goes on to explore the implications of potential network collapses, the concomitant need for operating reserve requirements and whether market prices will provide incentives for investments consistent with these reserve requirements.

Keywords: Electricity, incentives, regulation

JEL Classification: L1, L5, L9

Suggested Citation

Joskow, Paul L. and Tirole, Jean, Reliability and Competitive Electricity Markets (February 2007). CEPR Discussion Paper No.DP6121, Available at SSRN: https://ssrn.com/abstract=1133766

Paul L. Joskow (Contact Author)

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Jean Tirole

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