The high volatility of electricity markets gives producers and retailers an incentive to hedge their exposure to electricity prices. This paper studies how welfare and investment incentives are affected when markets for derivatives are introduced, and to what extent this depends on market...

We model the regulation of irreversible capacity expansion by a firm with private information about capacity costs, where investments are financed from the firm's cash flows and demand is stochastic. The optimal mechanism is implemented by a revenue tax that increases with the price cap. If the...

In this paper we show that free entry decisions may be socially inefficient, even in a perfectly competitive homogeneous goods market with non-lumpy investments. In our model, inefficient entry decisions are the result of risk-aversion of incumbent producers and consumers, combined with...

In this paper we show that free entry decisions may be socially inefficient, even in a perfectly competitive homogeneous goods market with non-lumpy investments. In our model, inefficient entry decisions are the result of risk-aversion of incumbent producers and consumers, combined with...

This paper derives the optimal mix of generation technologies in the electricity sector and discusses how this mix will be achieved in a perfectly competitive electricity market. It then studies the detrimental effect of a price cap on short-term profitability and long-run investment incentives...