Transition from price capping to Profit Capping based on profit space in electricity market

Abstract

Price cap is indispensable to a modern competitive electricity market. As a matter of fact, price capping cannot suppress price fluctuation and evade the market risks effectively. The paper proposes a new price ceiling model, profit capping model (PCM), based on profit space theory in electricity market. Under such a model, peak load units have the same profit uplift as base load ones, but their sunk cost space boundaries are dynamically adjusted according to actual repayment. The PCM assimilates the advantages of two basic pricing methods, aims at evading market risks as well as attracting investment. The PCM overcomes fatal defects of price capping and provides a feasible solution for electricity market price ceiling.