Mothballing in power markets: An experimental study

Santiago Arango, Jaime A. Castañeda, Erik R. Larsen

Research output: Contribution to journalArticlepeer-review

7 Scopus citations

Abstract

The deregulation of many electricity markets over the last two decades raises a number of issues, among which: securing adequate investments in capacity, and the possibility of cyclical behavior in capacity, are important for security of supply. A number of policies and market mechanisms aiming for capacity adequacy and market stability exist; in this paper we focus on one of these, mothballing of generation capacity. In electricity markets, mothballing is the possibility for a power generation company to temporarily withdraw generation capacity for a time, often for a year or more. Our hypothesis is that mothballing will help to stabilize markets, but at the same time increase prices. We test this hypothesis using laboratory experiments, with a simplified model of a generic electricity market. We report an experiment with twelve markets, where subjects make investment decisions; half of them had full capacity utilization (T1) and the other half had the option to mothball capacity (T2). The predictions of the effects of mothballing were confirmed in the experimental markets: prices and generation capacity exhibit clear cycles in T1, and damped cycles in the second set of experiments, T2. Furthermore, mothballing leads to higher prices on average.

Original languageEnglish (US)
Pages (from-to)125-134
Number of pages10
JournalEnergy Economics
Volume36
DOIs
StatePublished - Mar 2013
Externally publishedYes

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics
  • Energy(all)

Fingerprint Dive into the research topics of 'Mothballing in power markets: An experimental study'. Together they form a unique fingerprint.

Cite this