Get 20M+ Full-Text Papers For Less Than $1.50/day. Start a 14-Day Trial for You or Your Team.

Learn More →

What is normal profit for power generation?

What is normal profit for power generation? Purpose – This paper aims to present a multi-period dynamic power project financing model to produce pragmatic estimates of benchmark wholesale power prices based on the principles of normal profit. This, in turn, can guide policymakers as to whether price spikes or bidding above marginal cost in wholesale electricity markets warrants any investigation at all. One of the seemingly complex areas associated with energy-only wholesale electricity pools is at what point market power abuse is present on the supply side. It should not be this way. If a theoretically robust measure of normal profit exists, identification of potential market power abuse is straightforward. Such a definition readily exists and can be traced back to the ground-breaking work of financial economists in the 1960s. Design/methodology/approach – Using a multi-period dynamic power project model, the authors produce pragmatic and theoretically robust measures of normal profit for project financed plant and plant financed on balance sheet. These model results are then integrated into a static partial equilibrium model of a power system. The model results are in turn used to guide policymaking on generator bidding in energy-only power markets. Findings – Under conditions of perfect plant availability and divisibility with no transmission constraints, energy-only markets result in clearing prices which are not economically viable in the long run. Bidding must, therefore, deviate from strict short-run marginal cost at some stage. To distinguish between quasi-contributions to substantial sunk costs and market power abuse, a pragmatic and robust measure of normal profit is required. Originality/value – This article finds policymakers can be guided by an ex-post analysis of base energy prices against pragmatic estimates for the long-run marginal cost of the base plant, and an ex-ante analysis of call option prices along the forward curve against pragmatic estimates of the carrying cost of the peaking plant. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Financial Economic Policy Emerald Publishing

What is normal profit for power generation?

Download PDF
27 pages

Loading next page...
 
/lp/emerald-publishing/what-is-normal-profit-for-power-generation-Fd31UZDR0W
Publisher
Emerald Publishing
Copyright
Copyright © Emerald Group Publishing Limited
ISSN
1757-6385
DOI
10.1108/JFEP-09-2013-0045
Publisher site
See Article on Publisher Site

Abstract

Purpose – This paper aims to present a multi-period dynamic power project financing model to produce pragmatic estimates of benchmark wholesale power prices based on the principles of normal profit. This, in turn, can guide policymakers as to whether price spikes or bidding above marginal cost in wholesale electricity markets warrants any investigation at all. One of the seemingly complex areas associated with energy-only wholesale electricity pools is at what point market power abuse is present on the supply side. It should not be this way. If a theoretically robust measure of normal profit exists, identification of potential market power abuse is straightforward. Such a definition readily exists and can be traced back to the ground-breaking work of financial economists in the 1960s. Design/methodology/approach – Using a multi-period dynamic power project model, the authors produce pragmatic and theoretically robust measures of normal profit for project financed plant and plant financed on balance sheet. These model results are then integrated into a static partial equilibrium model of a power system. The model results are in turn used to guide policymaking on generator bidding in energy-only power markets. Findings – Under conditions of perfect plant availability and divisibility with no transmission constraints, energy-only markets result in clearing prices which are not economically viable in the long run. Bidding must, therefore, deviate from strict short-run marginal cost at some stage. To distinguish between quasi-contributions to substantial sunk costs and market power abuse, a pragmatic and robust measure of normal profit is required. Originality/value – This article finds policymakers can be guided by an ex-post analysis of base energy prices against pragmatic estimates for the long-run marginal cost of the base plant, and an ex-ante analysis of call option prices along the forward curve against pragmatic estimates of the carrying cost of the peaking plant.

Journal

Journal of Financial Economic Policy – Emerald Publishing

Published: May 6, 2014

There are no references for this article.