Risk aversion and technology mix in an electricity market

Guy Meunier (1, 2)

1 ALISS - Alimentation et sciences sociales
2 X-DEP-ECO - Département d'Économie de l'École Polytechnique

This article analyzes the eff ect of risk and risk aversion on the long-term equilibrium technology mix in an electricity market. It develops a model where fi rms can invest in baseload plants with a fi xed variable cost and peak plants with a random variable cost, and demand for electricity varies over time but is perfectly predictable. At equilibrium the electricity price is partly determined by the random variable cost and the returns from the two kinds of plants are negatively correlated. When the variable cost of the peak technology is high the return of peak plants is low but the return to baseload plants is high. Risk-averse fi rms reduce the capacity of the riskiest technology and develop the capacity of the other, compared to risk-neutral fi rms. In the particular case where a risk-neutral fi rm invests heavily in baseload technology and only sparely in peak capacity, a risk-averse fi rm would invest less in baseload, increase peak capacity, and increase total installed capacity.

Mots clés: Electricity market; Technology mix; Risk aversion

Domaines: Economies et finances

Guy Meunier. Risk aversion and technology mix in an electricity market. 2013. ⟨hal-00906944⟩