The social efficiency of long-term capacity reserve mechanisms
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.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Paul Joskow & Jean Tirole, 2007.
"Reliability and competitive electricity markets,"
RAND Journal of Economics,
RAND Corporation, vol. 38(1), pages 60-84, March.
- Paul L. Joskow & Jean Tirole, 2004. "Reliability and Competitive Electricity Markets," NBER Working Papers 10472, National Bureau of Economic Research, Inc.
- Joskow, Paul L & Tirole, Jean, 2007. "Reliability and Competitive Electricity Markets," CEPR Discussion Papers 6121, C.E.P.R. Discussion Papers.
- Joskow, Paul L. & Tirole, Jean, 2004. "Reliability and Competitive Electricity Markets," IDEI Working Papers 310, Institut d'Économie Industrielle (IDEI), Toulouse.
- Paul Joskow & Jean Tirole, 2004. "Reliability and Competitive Electricity Markets," Working Papers 0408, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research.
- Joskow, P. & Tirole, J., 2004. "Reliability and Competitive Electricity Markets," Cambridge Working Papers in Economics 0450, Faculty of Economics, University of Cambridge.
- De Vries, Laurens J., 2007. "Generation adequacy: Helping the market do its job," Utilities Policy, Elsevier, vol. 15(1), pages 20-35, March.
- 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.
- 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.
- Peter Cramton & Steven Stoft, 2007. "Colombia Firm Energy Market," Papers of Peter Cramton 07cfem, University of Maryland, Department of Economics - Peter Cramton, revised 2007.