Policy Instruments with Fixed and Variable Components and Their Impact on Investments in Electricity Markets

The mathematical method peak-load pricing is used to predict the invested capacity for various traditional generation technologies in electricity markets. In this project, we extend this method to also account for non-dispatchable generation, such as wind power, as well as demand-side flexibility. Furthermore, we generalize the model to include policy instruments with both fixed and variable components — such as taxes, network tariffs, capacity mechanisms, and support schemes. This means we consider instruments where one part is proportional to the energy produced, while another part is proportional to the plant’s installed capacity. We compare the outcomes of different policy designs and assess which are most efficient from a societal perspective. The theoretical analysis is complemented by a qualitative discussion. Our goal is to provide recommendations for robust and long-term policy frameworks that support a sustainable and efficient energy transition.