Cross-border effects of capacity mechanisms

Abstract

This paper uses an agent-based model of interconnected electricity market to analyze the cross-border impact of a capacity market and a strategic reserve on consumer costs and on investment in generation capacity in the affected markets. We find that both capacity mechanisms can improve investment signals and cause positive cross border effects. The interconnected energy-only market could free ride on the additional capacity and may deter investment in this market. If a capacity market and a strategic reserve are implemented in neighboring regions, there appears to be a negative spillover effect on the strategic reserve due to the capacity market.