Contracts, Investment Incentives and Efficiency in the Restructured Electricity Market

The paper highlights and analyzes the tension between designing power sale agreements that reduce uncertainty for the private investors and running the power systems as more efficiently as possible in the restructured electricity market. The features of such agreements are preliminary in resolving this tension and, therefore, in orienting the development of electricity markets restructuring towards a competitive direction. We define a theoretical contractual model, highlighting the tension between the two opposite directions: reducing uncertainty and risk in order to attract private investment and operating the power system efficiently. We apply the theoretical model for analysing the formal structure of a selected sample of power purchase agreements, really operating in the restructured electricity markets all over the world. We show how competitive contracting can increase efficiency pressures and, at the same time, increase investment risk. We then discuss some policy implications for the design of power purchase contracts in the restructured electricity market.