Cycles in competitive electricity markets: a simulation study of the western United States

This paper describes the potential for power plant construction to appear in waves causing alternating periods of over and under supply of electricity. The end result would be major swings in market prices as the industry moves through the phases of a construction cycle. This paper begins with some background on why these cycles should be taken seriously as we write the rules for a restructured electricity industry. It uses computer simulation to learn that cycles could emerge if the western states adopt the market rules used in California. Construction cycles are a potentially serious problem, but they are not inevitable. This paper uses computer simulation to show that cycles could be dampened substantially by introducing a constant capacity payment along side of the market clearing price for energy. The paper concludes with an examination of the consumer impacts of a constant capacity payment. Wholesale consumers would experience higher costs in the short run, but lower energy prices would nullify the impact of capacity payments in the long run. Retail consumers would not necessarily face higher costs in the short run because of a reduction in charges for recovery of stranded costs. ( 1999 Elsevier Science Ltd. All rights