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Economic justifications of a backstop procurement arrangement in a capacity mechanism

May 2012

9th Intl. Conf. on the European Energy Market

This presentation aims at showing that a backstop procurement arrangement is fundamental for a capacity mechanism to ensure power security of supply. We rely on the analysis of capacity mechanisms implemented in the USA, in particular in the PJM and ISO-NE areas.

We show that a backstop procurement arrangement has two main advantages over a decentralized design. First the centralized forecast error on global peak demand, by the SO for instance, is necessarily less than the sum of the errors by suppliers in forecasting demand level of their own portfolio at peak time. Second, the missing amount of capacity is provided by a centralized auction when suppliers have failed to commit long enough in advance so that new capacity has enough time to be built and ready for delivery. European countries currently debating about the implementation and design of capacity mechanism should be aware of these advantages of a centralized capacity mechanism.

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