Uncertainty over Demand and the Energy Market

Abstract

The paper examines the three following issues connected to the energy market: 1.Uncertainty ex ante over demand, and the consequent choice of risking to either overproduce, or to underserve the market. 2.Capacity constraints for the energy firms, with the consequence that production is shared by a number of plants. 3.High fixed costs of setting up the distribution procedure, which make it likely to have regional monopolies in the retail market. The questions that the paper tries to answer are the following: 1) Will the energy firms be willing to connect in order to avoid blackouts? The answer in the paper is yes, but we did not consider the fixed cost of establishing the connection, very important indeed 2) What is the optimal structure of the market, i.e., what would the outcome of an unregulated process be? Would this outcome avoid blackouts?