Abstract
The traditional practice of pricing capacity and energy separately will diminish as a consequence of restructuring the electric power industry. To the extent that capacity continues to be priced explicitly, those prices will be based not on the book value of investments in generating facilities but rather on the market value. We elucidate the determinants of market value by exploiting the observation that rights to capacity are equivalent to holding options on energy. Capacity values depend on the level, volatility, and correlation of energy and fuel prices. They also depend on the type and efficiency of the associated capacity.
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References
Black, Fischer. 1976. “The Pricing of Commodity Contracts.” Journal of Financial Economics 3 (January-March): 167–179.
Incentives Research Inc. 1995. Option Pricing for Project Evaluation: An Introduction. Palo Alto: Electric Power Research Institute (EPRI TR-104755).
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Office of Electricity Regulation. 1995. Generators’ Pool Price Undertaking 1994/95 (June).
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© 1997 Springer Science+Business Media New York
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Graves, F.C., Read, J.A. (1997). Capacity Prices in a Competitive Power Market. In: Awerbuch, S., Preston, A. (eds) The Virtual Utility. Topics in Regulatory Economics and Policy Series, vol 26. Springer, Boston, MA. https://doi.org/10.1007/978-1-4615-6167-5_8
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DOI: https://doi.org/10.1007/978-1-4615-6167-5_8
Publisher Name: Springer, Boston, MA
Print ISBN: 978-1-4613-7827-3
Online ISBN: 978-1-4615-6167-5
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