International Journal of Computational Science
1992-6669 (Print) 1992-6677 (Online) www.gip.hk/ijcs
© 2009 Global Information Publisher (H.K) Co., Ltd.
2009, Vol. 3, No. 5, 512-534.
Effect of Two Basic Pricing Mechanisms on Investment
Equilibrium of Electric Generation Industry
Ye Ze*, Zhang Xin-Hua, Cao Yong-Quan
School of Management, Changsha University of Science and Technology, Changsha, China
[email protected]
Abstract. Mechanism of electric generation capacity investment has been changed since electricity sector reform, and electricity market has undergone insufficiency of capacity investment
problem. Because of the publicity in electricity, as one of Premise Conditions in market, the
equilibrium of capacity investment must be ensured in pricing mechanism. Previous studies of
the pricing mechanism’s effect upon investment are usually limited to corporate investment
behaviors. Studying on pricing mechanism in favor of capacity investment equilibrium, two levels of researches are included in this paper: in the first part, based on real option theory, through
establishing the short-term industry investment model and the long-term game model under
the oligopoly competition market condition, the paper mainly analyzes impact on capacity investment equilibrium which brought by pricing mechanism policy. In the comparison with longterm equilibrium effect of different pricing mechanism policies, it is concluded that: the insufficiency of long-term capacity investment is serious under single tariff condition; Only when the
level of completely fixed capacity payment would be set precisely beforehand, has two tariff
condition induced long-term capacity investment equilibrium automatically in the mass. The
paper puts forward the adjustment policy of relatively fixed capacity payment, which calculation result shows that it not only induces long-term equilibrium in power market more rapidly,
but also more competition efficiency than the completely fixed capacity payment policy. In
the second part, according to the adjustment policy, by adopting the same real option method
and establishing the model of power generation enterprise investment decision strategy, the
* Corresponding Author. Email: [email protected].
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Supported by the National Social Science Fund (07BJY079) and Program for New Century Excellent Talents in University(NCET-07-0124).
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Effect of Two Basic Pricing Mechanisms on Investment Equilibrium of Electric Generation Industry
paper analyzes the effect of price cap mechanism and other concerned pricing mechanism policies on enterprise investment decision. It is concluded by the result that price cap can offset
negative influence upon generation enterprise investment, and the combination of low price cap
and relatively fixed capacity payment not only make a contribution to accelerating investment,
which leads to industry investment equilibrium, but also bring more efficiency to market competition. Therefore, individual and collective rationalities in capacity investment decision-making
are compatible under the combination condition of the low price cap and the relatively fixed
high-level capacity payment, which is the optimum design for pricing mechanism.
Keywords: single tariff, two-part tariff, investment threshold value, industry investment equilibrium.
Preview
Under the condition of vertical integration’s monopoly, electricity capacity investors receive fixed
profit based on the average social fund profit margin set beforehand. Although this pricing mechanism guarantees supply obligation, it induces effect of surplus investment, so poor efficiency in resource allocation. However, electricity market can enhance efficiency as a reform from the vertical
integration’s monopoly, probably it produces a problem of investment insufficiency, which can not
guarantee supply obligation. We have to make tradeoff and selection between the supply obligation
brought by monopoly and the efficiency in resource allocation brought by market system. Due to
publicity of electricity, the supply obligation is top-priority. Now how to put forward a special mechanism for electricity market and a regulation policy both concerning improvement for the market efficiency at a maximum, has become a key point which theory study and practical operation
of electricity market have to deal with. Pricing mechanism is a basic institution arrangement as well
as a crucial regulation policy, so the pricing mechanism design based on investment equilibrium becomes a new subject to solve the internal contradiction between supply obligation and competition
efficiency. This design is also innovation and improvement for the traditional price mechanism design which based on competition efficiency.
Studying on pricing mechanism in favor of capacity investment equilibrium, two levels of researches are included in this paper: in the first part, Based on real option theory, establishing generation enterprise capacity investment model, the paper mainly analyzes and studies impact on the
enterprise investment behavior which brought by different price policies, and it is concluded by
analysis and study that the combination of low price cap and relatively fixed capacity payment not
only make a contribution to accelerating investment, but also bring more efficiency to market competition. In the second part, based on the selected background of pricing mechanism above, applying
the same real options method to two-stage industry investment equilibrium model building under
oligopoly competition market condition, the paper makes further analysis on effect to industry investment equilibrium which brought by different price policies, and points out that relatively fixed
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