Electricity Generation [chapter]

2010 OECD Factbook  
In theory, competitive electricity markets can provide incentives for efficient investment in generating capacity. We show that if consumers and investors are risk averse, investment is efficient only if investors in generating capacity can sign longterm contracts with consumers. Otherwise the uncovered price risk increases financing costs, reduces equilibrium investment levels, distorts technology choice towards less capital-intensive generation and reduces consumer utility. We observe
more » ... We observe insufficient levels of long-term contracts in existing markets, possibly because retail companies are not credible counter-parties if their final customers can switch easily. With a consumer franchise, retailers can sign long-term contracts, but this solution comes at the expense of the idea of retail competition. Alternative capacity mechanisms to stimulate investment are discussed.
doi:10.1787/factbook-2010-39-en fatcat:v25yeox2wnco7hpk7l7ywimpem