How to Reduce the Investment Dilemma? - A Theoretical and Empirical Analysis of International Electricity Market Designs

• Applicant: Professor Dr. Wolfgang Ströbele
• Subject Area: Economic Theory
• Term: from 2007 to 2010
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 52159420

For about 15 years, a restructuring of international electricity markets has been taking place. In this research project, we aim to identify potential improvements for electricity market designs. We concentrate on analysing how these systems create opportunities and incentives for reducing the investment dilemma. Such a dilemma exists if essential investments in generating capacity are delayed significantly, because price signals do not indicate a long-run shortfall of capacity. In this project, we analyse both market-based and regulatory solutions for reducing the investment dilemma.With respect to market-based solutions, we intend to analyse and evaluate price signals in the forward market. Therefore, we develop a spot market model that considers the particular characteristics of electricity prices. In order to derive dynamic portfolios for hedging specific investment risks, we evaluate the prices of suitable derivatives (especially exotic options) on the basis of the spot market model. With respect to regulatory interventions, we concentrate on investigating the European CO2-alIowance trading scheme as a new opportunity for creating investment incentives, for instance through efficient systems of free allowance-allocation.

• DFG Programme: Research Grants
• International Connection: Belgium, United Kingdom
• Participating Persons: Professor Dr. Gert Brunekreeft; Professor Dr.-Ing. Hans-Jürgen Haubrich (†); Professor Dr. David Newbery; Professor Wim Schoutens