The first textbook to present a comprehensive and detailed economic analysis of electricity markets, analyzing the tensions between microeconomics and political economy.

The power industry is essential in our fight against climate change. This book is the first to examine in detail the microeconomics underlying power markets, stemming from peak-load pricing, by which prices are low when the installed generation capacity exceeds demand but can rise a hundred times higher when demand is equal to installed capacity. The outcome of peak-load pricing is often difficult to accept politically, and the book explores the tensions between microeconomics and political economy.

Understanding peak-load pricing and its implications is essential for designing robust policies and making sound investment decisions. Thomas-Olivier Léautier presents the model in its simplest form, and introduces additional features as different issues are presented. The book covers all segments of electricity markets: electricity generation, under perfect and imperfect competition; retail competition and demand response; transmission pricing, transmission congestion management, and transmission constraints; and the current policy issues arising from the entry of renewables into the market and capacity mechanisms. Combining anecdotes and analysis of real situations with rigorous analytical modeling, each chapter analyzes one specific issue, first presenting findings in nontechnical terms accessible to policy practitioners and graduate students in management or public policy and then presenting a more mathematical analytical exposition for students and researchers specializing in the economics of electricity markets and for those who want to understand and apply the underlying models.

About the Author

Thomas-Olivier Léautier has more than twenty years' experience in the electric power industry, both as an academic researcher and as a practitioner. He is currently Director of EDF Group University for Management and on the Research Faculty at the Toulouse School of Economics.

Jean Tirole, the 2014 Nobel Laureate in Economics, is Scientific Director of IDEI (Institut d'Economie Industrielle), Chairman of the Board of TSE (Toulouse School of Economics), and Annual Visiting Professor of Economics at MIT.

1 Introduction Ⅰ Wholesale Markets 2 Marcel Boiteux Forever: Peak-Load Pricing 3 From Enron with Love Ⅱ Retail Market 4 Selling Power to the People: Retail Competition and Vertical Strcture of the Power Industry 5 A Kuhnian Paradigm Shift: Price-Responsive Electricity Demand Ⅲ Network Issue 6 Fred Schweppe Meets Marcel Boiteux: Transmission Pricing 7 Serious Game: Market Power and Transmission Constraints Ⅳ Policy Issue 8 Gone with the Wind(and the Sun): Renewable Energy Sources Entry into Electricity Markets 9 The Highly Visible Hand: Capacity Mechanism 10 Concluding Observations