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Strategic Reserves versus Market-wide Capacity Mechanisms

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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, hydropower, and energy storage whose available capacity varies with circumstances and is difficult to estimate.

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  • Holmberg, Pär & Tangerås, Thomas, 2021. "Strategic Reserves versus Market-wide Capacity Mechanisms," Working Paper Series 1387, Research Institute of Industrial Economics.
    • Handle: RePEc:hhs:iuiwop:1387
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    Cited by:

    1. Sanchez Jimenez, I. & Bruninx, K. & de Vries, L.J., 2025. "Capacity remuneration mechanisms for decarbonized power systems," Applied Energy, Elsevier, vol. 391(C).
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    3. Billimoria, Farhad & Fele, Filiberto & Savelli, Iacopo & Morstyn, Thomas & McCulloch, Malcolm, 2022. "An insurance mechanism for electricity reliability differentiation under deep decarbonization," Applied Energy, Elsevier, vol. 321(C).
    4. Holmberg, Pär & Tangerås, Thomas, 2021. "Sweden's Energy Investment Challenge," Working Paper Series 1383, Research Institute of Industrial Economics.

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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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