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Winners and Losers in the Transition to a Competitive Electricity Industry: An Empirical Analysis

The objective of this paper is to show how the treatment of strandable assets, constrained by industrial customers' access to distributed generation technology, affects the prices paid by different classes of customers and the corresponding level of electricity sales. Competitive electricity rates are likely to be shaped by the regulatory need to recover strandable costs. The choice of recovery method (i.e., the structure of rates charged to customers) and the size of recovered costs will affect both total sales of electricity and consumer welfare. The availability of new turbine technology will limit the design of effective rate structures by giving industrial customers a credible threat to self-generate. A dynamic model using a complete Generalized Logit demand system coupled with an electricity supply system is used to evaluate the effects of different rate structures. The results show that stranding some assets is the best way to improve the welfare of all classes of customer and simultaneously increase the need for new generating capacity.

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Energy Specializations: Electricity – Distributed Generation; Electricity – Markets and Prices ; Electricity – Policy and Regulation

JEL Codes: Q41: Energy: Demand and Supply; Prices, Q42: Alternative Energy Sources, D40: Market Structure, Pricing, and Design: General

Keywords: Electricity industry, distributed generation, competition, stranded costs

DOI: 10.5547/ISSN0195-6574-EJ-Vol18-NoSI-8

Published in Volume 18, Special Issue of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.


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