Reliability and Competitive Electricity Markets

Paul Joskow and Jean Tirole

RAND Journal of Economics Vol 38, No. 1, pp. 60-84 (Spring 2007)

Paul Joskow and Jean Tirole, RAND Journal of Economics Vol 38, No. 1, pp. 60-84 (Spring 2007)

We derive the optimal prices and investment program for an electric power system when there are price-insensitive retail consumers served by load serving entities that can choose any level of rationing contingent on real-time prices. We then examine the assumptions required for competitive electricity markets to achieve this optimal price and investment program and the implications of relaxing several of these assumptions. We analyze the interrelationships between regulatorimposed wholesale market price caps and generating capacity obligations. The implications of potential network collapses for operating reserve requirements and whether market prices yield generation investments consistent with these reserve requirements are examined.

(CEEPR Working Paper 2004-008 is an earlier version of this article)

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