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The electricity capacity adequacy problem: Assessing dynamic effects of capacity remuneration mechanisms

May 2016

Energy Focus

In April 2015, the DG Competition launched a state aid sector inquiry into electricity capacity mechanisms in Europe. Like France, many European countries have decided to implement a new mechanism to ensure capacity adequacy in the power system, meaning having enough generation and demand-response capacity to serve the expected highest level of electricity demand in a reliable manner. However, the adopted solution is not unique: for instance, France and Great Britain implemented a capacity market whereas Sweden and Belgium chose a strategic reserve mechanism. These different choices raise the question of which mechanism is optimal from an economic point of view in order to solve the capacity adequacy issue.

The present paper studies this question and compares the social welfare of both aforementioned mechanisms from a dynamic point of view relying on a home-made model of investment behavior as a reaction to prices from the energy market and the implemented adequacy mechanism. Considering the dynamic aspect is particularly relevant due to the cyclical tendencies which are prone to appear in investments in generation

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