Capacity Markets for Electricity

Anna Creti and Natalia Fabra
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Anna Creti: University of Toulouse, IDEI & CEA

Industrial Organization from University Library of Munich, Germany

Abstract: 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).

Keywords: Electricity markets; capacity markets; regulation (search for similar items in EconPapers)
JEL-codes: C73 E32 L13 (search for similar items in EconPapers)
Date: 2003-09-16, Revised 2003-11-26
Note: Type of Document - Tex; prepared on IBM PC ; to print on HP;
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Citations: View citations in EconPapers (12)

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Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpio:0309002

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