Investment and deregulation in the electricity generation industry

This work addresses the issue of investment in the electricity generation industry. As the analysis of many crisis which have affected electricity markets shows, there is a systematic under-investment in peak capacity. Electricity prices are not high enough to cover fixed costs of such generators, a phenomenon that has been dubbed 'missing money' in some recent papers (Stoft). The investment decisions of a duo-poly facing random demand are then compared to those of a public monopoly. The results are that no prices may be high enough to solve the 'missing money' problem, since the duo-poly is able to exercise market power in order to maximize his profit. This results systematically in fewer peak capacity in the duo-poly case than in the public monopoly case. This remains true in the case of a n-oligopoly. The necessity of designing a mechanism remunerating capacity is thus demonstrated. Capacity markets are then analysed in the light of those results. What appears is that operating reserves are a public good and, as such, prevents capacity markets to solve the 'missing money' problem. This casts a shadow on the pursuit of deregulation in the electricity industry. (author)