Fontini, F., Vargiolu, T., Zormpas, D. (2021)

Investing in electricity production under a reliability options scheme. Journal of Economic Dynamics and Control126, 104004

 

Abstract:

Reliability Options (ROs) are used to enhance the security of supply in electricity systems. When a power producer writes a RO, s/he agrees to set a cap on the price of electricity that s/he cashes. In return, the system operator, i.e. the party that is buying the option, pays to the option issuer a fixed premium. In this paper we analyze how ROs affect the timing and value of investments in the energy sector and we show under what conditions they can be used as investment stimuli. We prove that, contrarily to what is expected, ROs can potentially harm the security of supply by delaying the adoption of new capacity and by reducing the value of investing in it. To avoid such a result, a careful setting of the relevant parameters is needed.