Why capacity market prices are too high

Todd Aagaard and Andrew Kleit

Utilities Policy, 2022, vol. 75, issue C

Abstract: The Federal Energy Regulatory Commission and regional transmission organizations have fixated on a concern that prices in electricity capacity markets are too low. In fact, however, capacity markets are significantly overpriced. The reason for this is that the administratively determined demand curves in capacity markets create conditions that procure far more electricity capacity than what is needed to meet reliability objectives. In particular, the operators of these markets systematically overestimate both the relevant peak demand for electricity and needed payments for generators to enter the market. The result is that consumer pay billions of dollars extra for excess capacity.

Keywords: Capacity markets; Cost of new entry; Peak demand forecast (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:juipol:v:75:y:2022:i:c:s0957178722000017

DOI: 10.1016/j.jup.2022.101335

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