| 10-01 | Electricity Market Structures to Reduce Seams and Enhance Investment
Our research explored these two contemporary issues: (1) enhancing economically efficient trade across neighboring electricity control areas and (2) structuring forward markets to facilitate adequate efficient investment in electric supply infrastructure. Both topics raise fundamental questions about the proper design of markets when substantial costs are incurred for developing new production capacity and/or for transporting the product. Economic theory is sparse on these subjects. Given two unique attributes of electricity, that it can’t be stored (optimal supply over time is simpler with storage) and that its reliability has public-good aspects that must be regulated, the need and opportunities for further improvement in electricity market designs are not surprising. Our theoretical analysis of spatial competition suggests that introducing arbitrage across boundaries can improve the competitiveness of adjacent markets, but that perverse flows from high- to low-priced areas may not be totally eliminated by that spatial competition when transport costs matter. These hypotheses were confirmed by our subsequent experimental trials. Theoretical analyses of the effect of forward markets on investment suggests that if they are conducted before the lead time needed to plan and construct new physical facilities, they can enhance the competitiveness and lower prices in the subsequent spot markets. Again our experimental trials confirmed these results where the forward markets are voluntary and accommodate financial arbitrage.
Final report on PSERC project M-9; uploaded Feb. 22, 2010. | Richard Schuler, Project Leader | 2/22/2010 | 1006.5k | PDF |
