Scandinavian Working Papers in Economics

Working Paper Series,
Research Institute of Industrial Economics

No 892: Nuclear Capacity Auctions

Sven-Olof Fridolfsson () and Thomas Tangerås ()
Additional contact information
Sven-Olof Fridolfsson: Research Institute of Industrial Economics (IFN), Postal: P.O. box 55665, SE-102 15 Stockholm, Sweden
Thomas Tangerås: Research Institute of Industrial Economics (IFN), Postal: P.O. box 55665, SE-102 15 Stockholm, Sweden

Abstract: We propose nuclear capacity auctions as a means to improve the incentives for investing in nuclear power. A properly designed auction would (i) allocate the license to the most efficient bidder; (ii) sell the license if and only if new nuclear power was socially optimal. In particular, capacity auctions open the market for large-scale entry by outside firms. Requiring licensees to sell a share of capacity as virtual power plant contracts increases auction efficiency by softening incumbent producers’ incentive to bid for market power. Our motivating example is Sweden’s recent decision to allow new nuclear power to replace old reactors.

Keywords: Capacity auctions; investments; market power; nuclear power; virtual power plants

JEL-codes: D44; L12; Q48

29 pages, December 15, 2011

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