Determinants of Investment Before competition, investment decisions were generally taken by the state or other public authorities, directly or indirectly, taking account of the whole power generation system. Whilst this approach was intended to minimise total system cost, high reliability levels and over-optimistic demand forecasts resulted in large amounts of excess capacity in some countries. This was partly due to unexpected economic circumstances, including a slowdown in the rate of economic growth. However, it was also a result of planning incentives which biased investment decisions towards overinvestment. In competitive markets, investment decisions are largely determined by current and expected prices.
Many prices influence investment decisions in generation assets.
To understand how investment decisions will be made under competition it is useful to consider the impact of three sets of prices that are likely to be the main determinants of investment decisions. Prices, in turn, depend on supply and demand factors like the willingness of users to pay for electricity and security of supply, or electricity demand growth. At an economy wide level, prices fluctuate with the business cycle. Prices in oligopolistic electricity markets So far, the evidence is that significant market concentration is a feature of most OECD countries' electricity supply industries, at least in the early stages of the market reform. This, in turn, encourages investment.