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Capacity Markets for Electricity

Listed author(s):
  • Anna Creti

    (University of Toulouse, IDEI & CEA)

  • Natalia Fabra

    (Universidad Carlos III de Madrid)

The creation of electricity markets has raised the fundamental question as to whether markets provide the right incentives for the provision of the reserves needed to maintain system reliability, or whether some form of regulation is needed. In some states in the US, electricity retailers have been made responsible for providing such reserves by contracting capacity in excess of their forecasted peak demand. The so-called Installed Capacity Markets (ICAP) provide one means for contracting reserves, and are the subject of this paper. In particular, for given productive and transmission capacities, we identify firms' opportunity costs of committing resources in the capacity market, and hence, the costs of inducing full capacity commitment. Regulatory issues such as the optimal choice of the reserve margin and the capacity deficiency rate (which serves as a price-cap) are analyzed. From a welfare view- point, we also compare the desirability of providing reserves either through capacity markets or through the demand side (i.e. power curtailments).

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Paper provided by EconWPA in its series Industrial Organization with number 0309002.

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Date of creation: 16 Sep 2003
Date of revision: 26 Nov 2003
Handle: RePEc:wpa:wuwpio:0309002
Note: Type of Document - Tex; prepared on IBM PC ; to print on HP;
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  1. Severin Borenstein & Stephen Holland, 2005. "On the Efficiency of Competitive Electricity Markets with Time-Invariant Retail Prices," RAND Journal of Economics, The RAND Corporation, vol. 36(3), pages 469-493, Autumn.
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