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Electricity and long-term capacity adequacy: The quest for regulatory mechanism compatible with electricity market

  • Finon, Dominique
  • Pignon, Virginie
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    This paper deals with theoretical aspects of long-term electricity supply security. Market prices and contractual arrangements on the physical and financial electricity markets do not allow the creation of sufficient incentives to invest in adequate capacity for guaranteeing the appropriate level of supply in every circumstance. Long-term security of supply by capacity adequacy must be conceptualised as a public good. Alternative solutions to reach capacity adequacy having been adopted in different markets are successively considered: public procurement of strategic reserves, capacity payments, capacity obligations with tradable rights. Each presents theoretical limits and practical drawbacks when implemented in complex markets. That brings out the interest of a mechanism of centralised auctions for forward capacity contracts (or reliability options); it combines controls by quantity and by price while stabilising investment in peak power plants and is compatible with energy and reserves markets, which is not the case with the three other mechanisms.

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    File URL: http://www.sciencedirect.com/science/article/B6VFT-4S26RP5-2/1/743f09c05fb66df13e0dd985f6aaed3f
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    Article provided by Elsevier in its journal Utilities Policy.

    Volume (Year): 16 (2008)
    Issue (Month): 3 (September)
    Pages: 143-158

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    Handle: RePEc:eee:juipol:v:16:y:2008:i:3:p:143-158
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30478

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    1. Abbott, Malcolm, 2001. "Is the Security of Electricity Supply a Public Good?," The Electricity Journal, Elsevier, vol. 14(7), pages 31-33.
    2. 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.
    3. Joskow, P. & Tirole, J., 2004. "Reliability and Competitive Electricity Markets," Cambridge Working Papers in Economics 0450, Faculty of Economics, University of Cambridge.
    4. Turvey, R., 2003. "Ensuring adequate generation capacity," Utilities Policy, Elsevier, vol. 11(2), pages 95-102, June.
    5. Cramton, Peter & Stoft, Steven, 2008. "Forward reliability markets: Less risk, less market power, more efficiency," Utilities Policy, Elsevier, vol. 16(3), pages 194-201, September.
    6. Oren, Shmuel S., 2005. "Generation Adequacy via Call Options Obligations: Safe Passage to the Promised Land," The Electricity Journal, Elsevier, vol. 18(9), pages 28-42, November.
    7. Cramton, Peter & Stoft, Steven, 2005. "A Capacity Market that Makes Sense," The Electricity Journal, Elsevier, vol. 18(7), pages 43-54.
    8. Bidwell, Miles, 2005. "Reliability Options: A Market-Oriented Approach to Long-Term Adequacy," The Electricity Journal, Elsevier, vol. 18(5), pages 11-25, June.
    9. repec:cup:cbooks:9780521477185 is not listed on IDEAS
    10. M. L. Weitzman, 1973. "Prices vs. Quantities," Working papers 106, Massachusetts Institute of Technology (MIT), Department of Economics.
    11. Finon, Dominique, 2006. "Incentives to invest in liberalised electricity industries in the North and South. Differences in the need for suitable institutional arrangements," Energy Policy, Elsevier, vol. 34(5), pages 601-618, March.
    12. Besser, Janet Gail & Farr, John G. & Tierney, Susan F., 2002. "The Political Economy of Long-Term Generation Adequacy: Why an ICAP Mechanism is Needed as Part of Standard Market Design," The Electricity Journal, Elsevier, vol. 15(7), pages 53-62.
    13. Hobbs, Benjamin F. & Iñón, Javier & Stoft, Steven E., 2001. "Installed Capacity Requirements and Price Caps: Oil on the Water, or Fuel on the Fire?," The Electricity Journal, Elsevier, vol. 14(6), pages 23-34, July.
    14. Roberts, Marc J. & Spence, Michael, 1976. "Effluent charges and licenses under uncertainty," Journal of Public Economics, Elsevier, vol. 5(3-4), pages 193-208.
    15. Hughes, William R. & Parece, Andrew, 2002. "The Economics of Price Spikes in Deregulated Power Markets," The Electricity Journal, Elsevier, vol. 15(6), pages 31-44, July.
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