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Composition of Electricity Generation Portfolios, Pivotal Dynamics, and Market Prices

Department of Economics, City University London, Northampton Square, London EC1V 0HB, United Kingdom; and Department of Economics and Business, Universitat Pompeu Fabra and Barcelona Graduate School of Economics, 08005 Barcelona, Spain
Department of Economics and Business, Universitat Pompeu Fabra and Barcelona Graduate School of Economics, 08005 Barcelona, Spain
albert.banalestanol{at}upf.edu
augusto.ruperezmicola{at}upf.edu

We use simulations to study how the diversification of electricity generation portfolios influences wholesale prices. We find that the relationship between technological diversification and market prices is mediated by the supply-to-demand ratio. In each demand case there is a threshold where pivotal dynamics change. Pivotal dynamics pre- and post-threshold are the cause of nonlinearities in the influence of diversification on market prices. The findings are robust to changes in the main market assumptions.

Key Words: electricity; market power; simulations; technology diversification
History: Received: November 22, 2007; accepted: June 19, 2009.