On investment decisions in liberalized electricitymarkets: the impact of price caps at the spot market

We analyze the impact of a uniform price cap at electricity spot markets on firms investmentdecisions and on welfare. Since investment decisions for those markets are taken in the longrun, fluctuating demand at the spot market eventually gives rise to high price spikes in case ofbinding capacities. Those price spikes are considered to send accurate signals for investmentin generation capacities, limiting those spikes by price caps is thought to reduce firms'investment incentives.We are able to show that this is not true for the case of strategic investment behavior. Morespecifically we analyze a market game where firms choose capacities prior to a spot marketwhich is subject to fluctuating or uncertain demand. We derive, that appropriately chosenprice caps do always increase firms investment incentives under imperfect competition. Wefurthermore characterize the optimal price cap. Based on the theoretical framework, weempirically analyze the impact of uniform price caps on the German electricity market....