Investment risk allocation in decentralised electricity markets. The need of long-term contracts and vertical integration - École des Ponts ParisTech Access content directly
Journal Articles OPEC Energy Review Year : 2008

Investment risk allocation in decentralised electricity markets. The need of long-term contracts and vertical integration

Abstract

None of the far-reaching experiments in electricity industry liberalisation was able to ensure the timely and optimal capacity mix development. The theoretical market model features market failures due to the specific volatility of prices, and the difficulty of creating complete markets for hedging. In this paper, we focused on a specific failure, i.e. the impossibility of allocating the various risks borne by the producer onto suppliers and consumers in order to allow capacity development. Promotion of short-term competition by mandating vertical de-integration tends to distort investments in generation by impeding efficient risk allocation.Following Joskow's (2006) line, we developed an empirical analysis of how to secure investments in generation through vertical arrangements between decentralised generators and large purchasers, suppliers or consumers. Empirical observations as risk analysis shows that adopting such arrangements may prove necessary. Various types of long-term contracts between generators and suppliers (fixed-quantity and fixed-price contract, indexed price contract, tolling contract, financial option) appear to offer effective solutions for risk allocation. Vertical integration appears to be another effective way to allocate risk. But it remains an important complementary condition to efficient risk allocation, i.e. that retail competition is sticky or legally limited in order to have a large part of risks borne by consumers on the different market segments.

Dates and versions

hal-00755988 , version 1 (22-11-2012)

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Cite

Dominique Finon. Investment risk allocation in decentralised electricity markets. The need of long-term contracts and vertical integration. OPEC Energy Review, 2008, 32 (2), pp.150-182. ⟨10.1111/j.1753-0237.2008.00148.x⟩. ⟨hal-00755988⟩
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