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Abstract

Investment Incentives and Electricity Market Design: the British Experience

The Review of Network Economics

Vol. 4, Issue 2 - June 2005, pp 93 - 128



Author's
  Fabien A. Roques
Judge Institute of Management, University of Cambridge, England
E-mail: [email protected]

David M. Newbery
Department of Applied Economics, University of Cambridge, England

William J. Nuttall
Judge Institute of Management, University of Cambridge, England

Abstract
  There is no academic consensus on which electricity market design provides the least distorting investment incentives. Theory suggests that "energy-only markets" can allow capacity cost recovery by generators. However, separate payments for capacity or reserve obligations do not need to rely on infrequent price spikes to remunerate reserve capacity. Three years after the controversial change from the compulsory British Electricity Pool with capacity payments to the decentralised energy-only New Electricity Trading Arrangements (NETA), we contrast the two market designs in terms of investment incentives, analyse NETA's balancing market failures, and review the case for regulatory support for investment.

Keywords: electricity market, investment, capacity, NETA

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