Competition, Contracts and Electricity Markets
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Competition, Contracts and Electricity Markets

A New Perspective

Edited by Jean-Michel Glachant, Dominique Finon and Adrien de Hauteclocque

This book fills a gap in the existing literature by dealing with several issues linked to long-term contracts and the efficiency of electricity markets. These include the impact of long-term contracts and vertical integration on effective competition, generation investment in risky markets, and the challenges for competition policy principles.
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Chapter 3: Investment and Competition in Decentralized Electricity Markets: How to Overcome Market Failure by Market Imperfections?

Dominique Finon


Dominique Finon1 INTRODUCTION 1 During the design of the market electricity reforms, the issue of investment in generating capacity generally received insufficient attention in the reference model for reforms. This model is a vertically and horizontally de-integrated industry facilitating entry and allowing effective competition on each market from wholesales to retail sales. Regulation tends to limit vertical integration and long-term contract between producers and suppliers, and between suppliers and consumers, and to incite historic producers-suppliers to divest in generation in order to limit the classical incumbents’ advantages and to ease entries in view of effective competition.2 In a number of jurisdictions in North America, Australia and Europe, it has been the reference model for defining new industrial structures and market rules and it still is for the sectoral regulators and the antitrust authorities which tend to condemn historic suppliers’ long-term contracts and vertical integration as barriers to entries and restriction of potential competition. The canonical business model in generation is the merchant plant, a stand-alone producer which sells all this production on short-term markets and without a long-term contract at a fixed price and develops its new capacities under project financing by non-recourse debt. The producer is supposed to bear all the risks (project risks, price risk, input cost risk and volume risk). This insufficient attention was starkly highlighted by the crises on electricity markets that were partly due to inadequate capacity and by the focus of generators’ investment decision on gas generation technologies which could create an excessive specialization...

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