Why do we need capacity markets?

Abstract

The publications on the power balance for Europe by ENTSO-E indicate diminishing power reserves in practically all European Union countries. There are two main reasons named as: (a) missing money and (b) missing capacity. The former relates to the existing power assets which capacities are not offered to Transmission System Operators because market prices are too low to provide the return of operating costs. The latter results from a lack of economic signals from electricity markets to encourage power companies to invest in new power generating capacity. The solution to the existing power balance problems and the emerging challenges relating to new investments seems to be the introduction of capacity or power markets in parallel to the existing electricity markets. The analysis presented focuses on the best structure and rules for capacity markets to ensure the smooth introduction and non-conflicting cooperation with the existing energy markets. The critical analysis indicates that decentralized capacity markets can be the solutions not only for improvement of power adequacy but also for stimulation of Distributed Generation and Demand Side Response.