Dynamic Investment in Electricity Markets and Its Impact on System Reliability

In this paper we view the problem of adequate electricity supply and demand as a dynamic process affected by several fundamental factors. By incorporating the effect of the available price signals on investment decisions we model the investment dynamics for (i) a system comprising both spot and futures (forward) markets, and for (ii) a system comprising a spot and an installed capacity (ICAP) market. In particular, we analyze the effect of timing of price information available on the dynamics of longterm supply/demand and price evolution. It is shown how by having a futures market, investment decisions to add new capacity could be executed without much delay while the investors are guaranteed revenues through long-term futures (forward) contracts. The modeling and simulations are performed using aggregate long-term price models.