Edited by Joanne Evans and Lester C. Hunt
Chapter 27: Security of Supply in Large Hydropower Systems: The Brazilian Case
Based on US experience, Joskow (2006) argues that wholesale power markets do not stimulate investments in new capacity, as they are not fully remunerated. A fully competitive electricity market has two general states of nature which are set out in Figure 27.1. In the first state, which characterizes the usual operation of power systems, power generation is lower than installed capacity, moving energy price to the operational costs of the most expensive power plant dispatched. Cheaper power plants earn an infra-marginal rent, the difference between the system price and their marginal cost. In the second state of nature, which takes place in only a few hours of the average year, the system operates at full capacity (Kmax) to meet demand and the energy price moves to the value of lost load (VOLL). In this situation, two kinds of rent are generated. The usual infra-marginal rent and a scarcity rent, measured by the difference between the system price and the marginal cost of the most expensive power plant. Infra-marginal and scarcity rents are both essential to pay for the capital costs of the power plants. However, price caps (institutional constraints) are usually used to limit the escalation of the...
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