The capacity market debate: What is the underlying market failure?

IF 3.8 3区经济学 Q3 ENERGY & FUELS

Utilities Policy Pub Date : 2025-03-18 DOI:10.1016/j.jup.2025.101926

Darryl R. Biggar , Mohammad Reza Hesamzadeh

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Abstract

Investment in liberalized wholesale electricity markets is typically not driven by spot and forward wholesale energy price signals alone. Instead, in most wholesale electricity markets there is a separate mechanism to procure, fund or subsidize investment in generation or demand response capacity. These mechanisms are known as capacity markets and are often highly controversial. There remains substantial debate over whether these mechanisms are necessary and, if so, how they should be designed. This paper provides a theoretical analysis of the capacity market debate. We observe that an intuitive understanding of the effects of capacity mechanisms may be misleading. While a capacity mechanism may offset the effects of a price cap, if the price cap is funded through a levy on consumption the combined effect of the tax and subsidy is to nullify the price cap. We explore possible reasons for under-investment concerns in wholesale electricity markets, focusing on the potential for a lack of liquidity in the hedge market arising from the presence of uninsurable risks. We identify three groups of uninsurable risks and propose policies to address them.

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产能市场之争：潜在的市场失灵是什么？

开放的电力批发市场的投资通常不受现货和远期批发能源价格信号的单独驱动。相反，在大多数批发电力市场中，有一个单独的机制来采购、资助或补贴发电或需求响应能力的投资。这些机制被称为产能市场，往往极具争议。对于这些机制是否必要，以及如果有必要，应该如何设计，仍存在大量争论。本文对容量市场之争进行了理论分析。我们观察到，对能力机制影响的直观理解可能会产生误导。虽然容量机制可以抵消价格上限的影响，但如果价格上限是通过对消费征税来资助的，那么税收和补贴的综合效果将使价格上限无效。我们探讨了批发电力市场投资不足的可能原因，重点是由于不可保险风险的存在而导致对冲市场缺乏流动性的可能性。我们确定了三组不可保险的风险，并提出了解决这些风险的政策。

本文章由计算机程序翻译，如有差异，请以英文原文为准。

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来源期刊

Utilities Policy ENERGY & FUELS-ENVIRONMENTAL SCIENCES

CiteScore

6.80

自引率

10.00%

发文量

审稿时长

66 days

期刊介绍： Utilities Policy is deliberately international, interdisciplinary, and intersectoral. Articles address utility trends and issues in both developed and developing economies. Authors and reviewers come from various disciplines, including economics, political science, sociology, law, finance, accounting, management, and engineering. Areas of focus include the utility and network industries providing essential electricity, natural gas, water and wastewater, solid waste, communications, broadband, postal, and public transportation services. Utilities Policy invites submissions that apply various quantitative and qualitative methods. Contributions are welcome from both established and emerging scholars as well as accomplished practitioners. Interdisciplinary, comparative, and applied works are encouraged. Submissions to the journal should have a clear focus on governance, performance, and/or analysis of public utilities with an aim toward informing the policymaking process and providing recommendations as appropriate. Relevant topics and issues include but are not limited to industry structures and ownership, market design and dynamics, economic development, resource planning, system modeling, accounting and finance, infrastructure investment, supply and demand efficiency, strategic management and productivity, network operations and integration, supply chains, adaptation and flexibility, service-quality standards, benchmarking and metrics, benefit-cost analysis, behavior and incentives, pricing and demand response, economic and environmental regulation, regulatory performance and impact, restructuring and deregulation, and policy institutions.