Risk-return incentives in liberalised electricity markets

Muireann Á Lynch, Aonghus Shortt, Richard S.J. Tol, Mark J. O'Malley

Research output: Contribution to JournalArticleAcademicpeer-review

Abstract

We employ Monte Carlo analysis to determine the distribution of returns for various electricity generation technologies. Costs and revenues for each technology are calculated by means of a unit commitment and economic dispatch algorithm at hourly resolution. This represents a considerable contribution to the literature as costs and revenues are determined endogenously, which in turn allows the returns of midmerit and peaking plant to be examined. Market entry is determined on the basis of a heuristic while market exit is according to a predetermined retirement schedule. The results show that CCGT is the investment technology of choice for baseload-only portfolios, while OCGT proves optimal when all technologies are considered. The high capital costs of baseload generation reduce incentives to invest. The methodology can be expanded to consider random outages, revenues from scarcity prices, capacity markets and ancillary service payments.

LanguageEnglish
Pages598-608
Number of pages11
JournalEnergy Economics
Volume40
DOIs
Publication statusPublished - Nov 2013

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Costs
Outages
Electricity
Economics
Revenue
Risk-return
Electricity market
Incentives
Power markets
Schedule
Monte Carlo analysis
Electricity generation
Heuristics
Ancillary services
Unit commitment
Retirement
Technology investment
Methodology
Cost of capital
Payment

Keywords

  • Electricity generation investment
  • Mean-variance portfolio theory
  • Monte Carlo simulation

Cite this

Lynch, Muireann Á ; Shortt, Aonghus ; Tol, Richard S.J. ; O'Malley, Mark J. / Risk-return incentives in liberalised electricity markets. In: Energy Economics. 2013 ; Vol. 40. pp. 598-608.
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Risk-return incentives in liberalised electricity markets. / Lynch, Muireann Á; Shortt, Aonghus; Tol, Richard S.J.; O'Malley, Mark J.

In: Energy Economics, Vol. 40, 11.2013, p. 598-608.

Research output: Contribution to JournalArticleAcademicpeer-review

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