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Power Generation Investment in Electricity Markets

Power Generation Investment in Electricity Markets by Organisation for Economic Co-operation and Development
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Most IEA countries are liberalising their electricity markets, shifting the responsibility for financing new investment in power generation to private investors. No longer able to automatically pass on costs to consumers, and with future prices of electricity uncertain, investors face a much riskier environment for investment in electricity infrastructure.

This report looks at how investors have responded to the need to internalise investment risk in power generation. While capital and total costs remain the parameters shaping investment choices, the value of technologies which can be installed quickly and operated flexibly is increasingly appreciated.  Investors are also managing risk by greater use of contracting, by acquiring retail businesses, and through mergers with natural gas suppliers.

While liberalisation was supposed to limit government intervention in the electricity market, volatile electricity prices have put pressure on governments to intervene and limit such prices.  This study looks at several cases of volatile prices in IEA countries’ electricity markets, and finds that while market prices can be a sufficient incentive for new investment in peak capacity, government intervention into the market to limit prices may undermine such investment.

Organisation for Economic Co-operation and Development; January 2003
104 pages; ISBN 9789264105577
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Title: Power Generation Investment in Electricity Markets
Author: Organisation for Economic Co-operation and Development