Long-term investment in electricity: a trade-off between co-ordination and competition?

The purpose of this paper is to survey the theoretical debate and the practical problems of long-term investment in electricity. It discusses fundamental aspects of investment in electricity such as the interdependencies between generation and grid investment, free-riding problems, and the investment signals of different network access regimes. Especially, the externalities that are created by the nature of electric flows pose severe problems for investment decisions. The way these externalities are internalised in the pricing scheme strongly influences where rents are collected and investment is profitable. Besides, the handling of the loop-flow phenomenon is crucial for the trade-off between co-ordination and competition in long-term investment in electricity.