Premium
Investment Incentives and Electricity Spot Market Competition
Author(s) -
Grimm Veronika,
Zoettl Gregor
Publication year - 2013
Publication title -
journal of economics and management strategy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.672
H-Index - 68
eISSN - 1530-9134
pISSN - 1058-6407
DOI - 10.1111/jems.12029
Subject(s) - incentive , spot market , electricity , competition (biology) , investment (military) , electricity market , spot contract , economics , industrial organization , business , welfare , microeconomics , market economy , finance , ecology , politics , political science , law , electrical engineering , biology , engineering , futures contract
In this paper we analyze investment decisions of strategic firms that anticipate competition on many consecutive spot markets with fluctuating (and possibly uncertain) demand. We study how the degree of spot market competition affects investment incentives and welfare and provide an application of the model to electricity market data. We show that more competitive spot market prices strictly decrease investment incentives of strategic firms. The effect can be severe enough to even offset the beneficial impact of more competitive spot markets on social welfare. Our results obtain with and without free entry. The analysis demonstrates that investment incentives necessarily have to be taken into account for a serious assessment of electricity spot market design.