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The social efficiency of long-term capacity reserve mechanisms

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  • Finon, Dominique
  • Meunier, Guy
  • Pignon, Virginie

Abstract

In Public Economics, the simple supply mechanism for a collective good is the centralised provision by government, and paid by all beneficiaries through a small and targeted tax. In the case of capacity adequacy in power supply, which could be considered as a collective good, two solutions of supply by government can be envisaged: a long-term capacity reserve contracting by the system operator (SO), and a direct installation of peaking units by the SO. However, the centralised and direct mechanisms are criticised, because of its potential to distort incentives to invest in peaking units and hence the natural functioning of energy markets. This paper analyses the different characters of a simple capacity mechanism and the safeguards used to limit its potential distortion effects. We discuss its deterrent effects on investment in peaking units. We also demonstrate its advantage in the context of hydro or mixed electricity systems exposed to the risk of exceptionally dry years.

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Bibliographic Info

Article provided by Elsevier in its journal Utilities Policy.

Volume (Year): 16 (2008)
Issue (Month): 3 (September)
Pages: 202-214

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Handle: RePEc:eee:juipol:v:16:y:2008:i:3:p:202-214

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Web page: http://www.elsevier.com/locate/inca/30478

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  1. Peter Cramton & Steven Stoft, 2007. "Colombia Firm Energy Market," Papers of Peter Cramton 07cfem, University of Maryland, Department of Economics - Peter Cramton, revised 2007.
  2. Paul Joskow & Jean Tirole, 2004. "Reliability and Competitive Electricity Markets," Working Papers 0408, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research.
  3. Peter Cramton & Steven Stoft, 2006. "The Convergence of Market Designs for Adequate Generating Capacity," Papers of Peter Cramton 06mdfra, University of Maryland, Department of Economics - Peter Cramton, revised 2006.
  4. Batlle, Carlos & Pérez-Arriaga, Ignacio J., 2008. "Design criteria for implementing a capacity mechanism in deregulated electricity markets," Utilities Policy, Elsevier, vol. 16(3), pages 184-193, September.
  5. De Vries, Laurens J., 2007. "Generation adequacy: Helping the market do its job," Utilities Policy, Elsevier, vol. 15(1), pages 20-35, March.
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Cited by:
  1. Boccard, Nicolas, 2010. "Economic properties of wind power: A European assessment," Energy Policy, Elsevier, vol. 38(7), pages 3232-3244, July.
  2. Vandezande, Leen & Meeus, Leonardo & Belmans, Ronnie & Saguan, Marcelo & Glachant, Jean-Michel, 2010. "Well-functioning balancing markets: A prerequisite for wind power integration," Energy Policy, Elsevier, vol. 38(7), pages 3146-3154, July.
  3. Roques, F.A., 2008. "Market Design for Generation Adequacy: Healing Causes rather than Symptoms," Cambridge Working Papers in Economics 0821, Faculty of Economics, University of Cambridge.
  4. Katrin Schmitz & Bjarne Steffen & Christoph Weber, 2013. "Incentive or impediment? The impact of capacity mechanisms on storage plants," RSCAS Working Papers 2013/46, European University Institute.
  5. Vincent Rious, Fabien Roques and Yannick Perez, 2012. "Which electricity market design to encourage the development of demand response?," RSCAS Working Papers 2012/12, European University Institute.
  6. Batlle, C. & Rodilla, P., 2010. "A critical assessment of the different approaches aimed to secure electricity generation supply," Energy Policy, Elsevier, vol. 38(11), pages 7169-7179, November.

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