TY - JOUR
T1 - Cycles in deregulated electricity markets
T2 - Empirical evidence from two decades
AU - Arango, Santiago
AU - Larsen, Erik
PY - 2011
Y1 - 2011
N2 - In this article, we discuss the "cycle hypothesis" in electricity generation, which states that the introduction of deregulation in an electricity system might lead to sustained fluctuations of over- and under-capacity. The occurrence of cycles is one of the major threats for electricity markets as it affects the security of supply, and creates uncertainty in both the profitability of electricity companies and in consumer prices. We discuss the background for these cycles using analogies with other capital-intensive industries, along with evidence from the analysis of behavioral simulation models as well as from experimental electricity markets. Using data from the oldest deregulated markets we find support for the hypothesis in the case of the English and Chilean markets, based on an autocorrelation analysis. Evidence from the Nordpool market is more ambiguous, although we might be observing the first half of a cycle in generation capacity. Comparing a simulation of the English market performed in 1992 with the actual performance we can observe that the qualitative behavior of the model is consistent with the actual evolution. Finally, we discuss possible mechanisms for damping cycles in electricity generation, such as mothballing, capacity payments, and reliability markets.
AB - In this article, we discuss the "cycle hypothesis" in electricity generation, which states that the introduction of deregulation in an electricity system might lead to sustained fluctuations of over- and under-capacity. The occurrence of cycles is one of the major threats for electricity markets as it affects the security of supply, and creates uncertainty in both the profitability of electricity companies and in consumer prices. We discuss the background for these cycles using analogies with other capital-intensive industries, along with evidence from the analysis of behavioral simulation models as well as from experimental electricity markets. Using data from the oldest deregulated markets we find support for the hypothesis in the case of the English and Chilean markets, based on an autocorrelation analysis. Evidence from the Nordpool market is more ambiguous, although we might be observing the first half of a cycle in generation capacity. Comparing a simulation of the English market performed in 1992 with the actual performance we can observe that the qualitative behavior of the model is consistent with the actual evolution. Finally, we discuss possible mechanisms for damping cycles in electricity generation, such as mothballing, capacity payments, and reliability markets.
KW - Cycles
KW - Deregulation
KW - Electricity markets
UR - http://www.scopus.com/inward/record.url?scp=79953315738&partnerID=8YFLogxK
U2 - 10.1016/j.enpol.2011.02.010
DO - 10.1016/j.enpol.2011.02.010
M3 - Journal article
AN - SCOPUS:79953315738
SN - 0301-4215
VL - 39
SP - 2457
EP - 2466
JO - Energy Policy
JF - Energy Policy
IS - 5
ER -