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This paper sets out the economic foundations that underlie competitive markets in electricity generation. It moves from a general formulation of a competitive market to discuss traditional models of optimal electricity pricing. It shows how an auction market can produce the same results and discusses the option of bilateral trading. Models of market power, which can lead to higher process and reduced efficiency, are then discussed. The final part of the paper deals with network effects.
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Richard Green (2000) studied this question.
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