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Electricity and long-term capacity adequacy: The quest for regulatory mechanism compatible with electricity market

Dominique Finon and Virginie Pignon

Utilities Policy, 2008, vol. 16, issue 3, 143-158

Abstract: This paper deals with theoretical aspects of long-term electricity supply security. Market prices and contractual arrangements on the physical and financial electricity markets do not allow the creation of sufficient incentives to invest in adequate capacity for guaranteeing the appropriate level of supply in every circumstance. Long-term security of supply by capacity adequacy must be conceptualised as a public good. Alternative solutions to reach capacity adequacy having been adopted in different markets are successively considered: public procurement of strategic reserves, capacity payments, capacity obligations with tradable rights. Each presents theoretical limits and practical drawbacks when implemented in complex markets. That brings out the interest of a mechanism of centralised auctions for forward capacity contracts (or reliability options); it combines controls by quantity and by price while stabilising investment in peak power plants and is compatible with energy and reserves markets, which is not the case with the three other mechanisms.

Date: 2008
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