{"title":"Indivisibilities in investment and the role of a capacity market","authors":"","doi":"10.1007/s11149-024-09473-6","DOIUrl":null,"url":null,"abstract":"<h3>Abstract</h3> <p>The topic of pricing non-convexities in power markets has been explored vividly in the literature and among practitioners for the past twenty years. The debate has been focused on indivisibilities in short-term auctions, the computational tractability of some pricing proposals, and the economic analysis of their behavior. In this paper, we analyse a source of non-convexities that is not discussed as broadly: the indivisibilities in investment decisions. The absence of equilibrium that we are primarily concerned about is the <em>long-term</em> equilibrium. We derive a capacity expansion model with indivisibilities and we highlight the issues arising from it. We discuss its relevance and address one particular argument for neglecting indivisibilities in investment, namely market size. We investigate to what extent a capacity market that clears discrete offers can mitigate the lumpiness problem. We particularly introduce the novel concept of convex hull pricing for capacity auctions. We illustrate the main findings with a numerical experiment conducted on the capacity expansion model used by ENTSO-E to assess the adequacy of the entire European system.</p>","PeriodicalId":47149,"journal":{"name":"Journal of Regulatory Economics","volume":"249 1","pages":""},"PeriodicalIF":1.4000,"publicationDate":"2024-03-07","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":"0","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"Journal of Regulatory Economics","FirstCategoryId":"96","ListUrlMain":"https://doi.org/10.1007/s11149-024-09473-6","RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"Q3","JCRName":"ECONOMICS","Score":null,"Total":0}
引用次数: 0
Abstract
The topic of pricing non-convexities in power markets has been explored vividly in the literature and among practitioners for the past twenty years. The debate has been focused on indivisibilities in short-term auctions, the computational tractability of some pricing proposals, and the economic analysis of their behavior. In this paper, we analyse a source of non-convexities that is not discussed as broadly: the indivisibilities in investment decisions. The absence of equilibrium that we are primarily concerned about is the long-term equilibrium. We derive a capacity expansion model with indivisibilities and we highlight the issues arising from it. We discuss its relevance and address one particular argument for neglecting indivisibilities in investment, namely market size. We investigate to what extent a capacity market that clears discrete offers can mitigate the lumpiness problem. We particularly introduce the novel concept of convex hull pricing for capacity auctions. We illustrate the main findings with a numerical experiment conducted on the capacity expansion model used by ENTSO-E to assess the adequacy of the entire European system.
期刊介绍：
Recent legislative and policy reforms have changed the nature of regulation. Partial deregulation has created a new dimension to regulatory problems, as the debate is extended to include diversification and new forms of regulation. The introduction of incentive-based rate schedules and ratemaking procedures, the integration of demand-side programs with planning for capitol expansion, and other developments, raise a host of theoretical and empirical questions. The Journal of Regulatory Economics serves as a high quality forum for the analysis of regulatory theories and institutions by developing the rigorous economics foundations of regulation. Both theoretical and applied works, including experimental research, are encouraged. Research in all aspects of regulation is of interest including traditional problems of natural monopoly, antitrust and competition policy, incentive regulation, deregulation, auction theory, new policy instruments, health and safety regulation, environmental regulation, insurance and financial regulation, hazardous and solid waste regulation, universal service obligation, and consumer product regulation. The JRE provides researchers, policy-makers, and institutions with current perspectives on the theory and practice of economics of regulation. While there are a number of journals and magazines that include the study of regulation, the JRE is unique in that it fills a gap in the market for a high quality journal dealing solely with the economics of regulation.Officially cited as: J Regul Econ
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