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Strategic Reserves versus Market-wide Capacity Mechanisms

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  • Holmberg, P.
  • TangerÃ¥s, T.

Abstract

Many electricity markets use capacity mechanisms to support generation owners. Capacity payments can mitigate imperfections associated with "missing money" in the spot market and solve transitory capacity shortages caused by investment cycles, regulatory changes, or technology shifts. We discuss capacity mechanisms used in different electricity markets around the world. We argue that strategic reserves, if correctly designed, are likely to be more efficient than market-wide capacity mechanisms. This is especially so in electricity markets that rely on substantial amounts of intermittent generation, hydro power, and energy storage whose available capacity varies with circumstances and is difficult to estimate.

Suggested Citation

  • Holmberg, P. & TangerÃ¥s, T., 2021. "Strategic Reserves versus Market-wide Capacity Mechanisms," Cambridge Working Papers in Economics 2132, Faculty of Economics, University of Cambridge.
    • Handle: RePEc:cam:camdae:2132
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    References listed on IDEAS

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    Cited by:

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    JEL classification:

    • D25 - Microeconomics - - Production and Organizations - - - Intertemporal Firm Choice: Investment, Capacity, and Financing
    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy

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