On the effects of capacity payments in competitive electricity markets: Capacity adequacy, price cap, and reliability

Irena Milstein and Asher Tishler

Energy Policy, 2019, vol. 129, issue C, 370-385

Abstract: This paper employs a two-stage model to assess the consequences of an easy-to-use form of capacity payments in competitive electricity markets. We show that capacity payments increase capacity and expected consumer surplus, with little or no effect on expected social welfare (expected consumer surplus plus expected profits minus the cost of using capacity payments minus expected outage costs). In addition, we demonstrate that capacity payments can substantially reduce or, sometimes, fully eliminate electricity outage costs due to price capping or unexpected failure of some generation capacity. Thus, regulators should consider using this form of capacity payments since, in addition to their favorable effect on consumers and on social welfare, they mitigate the ‘missing money’ problem and increase system reliability.

Keywords: Capacity payments; Missing money; Outage costs; Electricity markets; Endogenous capacity (search for similar items in EconPapers)
JEL-codes: D24 D43 L11 L94 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (19)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:enepol:v:129:y:2019:i:c:p:370-385

DOI: 10.1016/j.enpol.2019.02.028

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