Government procurement of peak capacity in the New Zealand electricity market

This paper analyzes the impact of government procurement of reserve electricity generation capacity on the long-run equilibrium in the electricity market. The approach here is to model the electricity market in a context where the supply companies have market power. The model is then used to analyze the impact of government direct supply of peak capacity on the market. We find that the firms build less peak-generation capacity when the government procures peak generating capacity. The long-run equilibrium with N firms and government capacity of KG results in an increase of total peak generation capacity of KG/(N+1) compared to the long-run equilibrium with no government capacity. Supply disruptions of baseline capacity during the peak time period are also considered. It is found that peak prices do not go up any further with (anticipated) supply disruptions. Instead the entire cost of the extra peakers is borne by customers on traditional meters and off-peak customers who face real-time pricing.