Efficient Pricing of Electricity Revisited

Abstract

Increasing shares of renewables challenge the classical way to trade electricity ex-ante: Coal power plants cannot react to the stochastic element of renewables, whereas gas turbines can. We use a theoretical model to analyze incentives of perfectly competitive firms to invest in different types of technologies under ex-ante pricing. Coal power firms recover costs, but renewables and gas turbine firms fail to do so. We identify imperfections that arise from the delay in price setting and market clearing. Do real-time prices induce an efficient outcome? Support is redundant for gas turbine firms, but renewables firms fail to recover costs.