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Trusting Capacity Markets

Does the lack of long-term pricing undermine the financing of new power plants?

Fortnightly Magazine - December 2011

hedged through long-term contracts. Projects may be built without PPAs, shorter-term PPAs, or PPAs that cover only a portion of the project’s expected sales.

11. For example, the DOE reports that in 2009, 38 percent of all new wind generation capacity was from merchant or quasi-merchant projects that relied on short-term contracts or hedged wholesale spot market sales rather than long-term PPAs. See Wiser and Bolinger (2010), 2009 Wind Technologies Report, DOE Energy Efficiency and Renewable Energy, August 2010, p. 34.

12. In the U.K., for example, restructuring in the early 1990s resulted in completely vertically unbundled industry structure. Today, the six largest competitive retail suppliers (supplying 99 percent of retail load) also own approximately 70 percent of the installed generating capacity. Note, however, that such partial integration by large companies will also tend to make it more difficult for smaller and non-integrated suppliers to enter and compete in the market. See Ofgem, Liquidity Proposals for the GB wholesale electricity market, February 2010.

13. For a discussion of the implications of vertical re-integration of competitive retail service and generation companies, see Meade and O’Connor (2009) “Comparison of Long-Term Contracts and Vertical Integration in Decentralised Electricity Markets,” Larsen Working Paper No. 26, October 2009; and Mansur (2007) “Upstream Competition and Vertical Integration in Electricity Markets,” 50 J. Law & Econ. 125.

14. See, for example, Bushnell, J. B., Mansur, E. T. & Saravia, C. (2008). “Vertical Arrangements, Market Structure, and Competition: An Analysis of Restructured U.S. Electricity Markets.” American Economic Review, 98, 237-266.