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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.

Suggested Citation

  • Finon, Dominique & Meunier, Guy & Pignon, Virginie, 2008. "The social efficiency of long-term capacity reserve mechanisms," Utilities Policy, Elsevier, vol. 16(3), pages 202-214, September.
  • Handle: RePEc:eee:juipol:v:16:y:2008:i:3:p:202-214
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    References listed on IDEAS

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    1. Paul Joskow & Jean Tirole, 2007. "Reliability and competitive electricity markets," RAND Journal of Economics, RAND Corporation, vol. 38(1), pages 60-84, March.
    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.
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    2. Roques, Fabien A., 2008. "Market design for generation adequacy: Healing causes rather than symptoms," Utilities Policy, Elsevier, vol. 16(3), pages 171-183, September.
    3. Hary, Nicolas & Rious, Vincent & Saguan, Marcelo, 2016. "The electricity generation adequacy problem: Assessing dynamic effects of capacity remuneration mechanisms," Energy Policy, Elsevier, vol. 91(C), pages 113-127.
    4. Rious, Vincent & Perez, Yannick & Roques, Fabien, 2015. "Which electricity market design to encourage the development of demand response?," Economic Analysis and Policy, Elsevier, vol. 48(C), pages 128-138.
    5. 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.
    6. Boccard, Nicolas, 2010. "Economic properties of wind power: A European assessment," Energy Policy, Elsevier, vol. 38(7), pages 3232-3244, July.
    7. 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.
    8. Bublitz, Andreas & Keles, Dogan & Zimmermann, Florian & Fraunholz, Christoph & Fichtner, Wolf, 2018. "A survey on electricity market design: Insights from theory and real-world implementations of capacity remuneration mechanisms," Working Paper Series in Production and Energy 27, Karlsruhe Institute of Technology (KIT), Institute for Industrial Production (IIP).
    9. 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.
    10. Bublitz, Andreas & Keles, Dogan & Zimmermann, Florian & Fraunholz, Christoph & Fichtner, Wolf, 2019. "A survey on electricity market design: Insights from theory and real-world implementations of capacity remuneration mechanisms," Energy Economics, Elsevier, vol. 80(C), pages 1059-1078.

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