From market uncertainty to policy uncertainty for investment in power generation: real options for NPP on electricity market

Abstract

In the electricity sector, market participants must make decisions about capacity choice in a situation of radical uncertainty about future market conditions. Sector is characterized by non-storability and periodic and stochastic demand fluctuations. Capacity determination is a decision for the long term, whereas production is adjusted in the short run. Paper looks on the main contributions in investment planning under uncertainty, in particular in the electricity market for capital intensive investments like NPP. The relationship between market and nonmarket factors (recent UK policy example) in determining investment signals in competitive electricity markets was analysed. Paper analyse the ability of competitive electricity markets to deliver the desired quantity and type of generation capacity and also investigates the variety of market imperfections operating in electricity generation and their impact on long-term dynamics for generation capacity. Paper analyses how price formation influences investment signals. Number of factors (including market power, wholesale price volatility, lack of liquidity in the wholesale and financial market, policy and regulatory risks etc.) contribute to polluting the price signal and generating sub-optimal behaviour.