Publication: Capacity Markets for Electricity
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2003
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Abstract
The creation of electricity markets has raised the fundamental question as to
whether markets provide the right incentives for the provision of the reserves needed
to maintain system reliability, or whether some form of regulation is needed. In some
states in the US, electricity retailers have been made responsible for providing such
reserves by contracting capacity in excess of their forecasted peak demand. The so-
called Installed Capacity Markets (ICAP) provide one means for contracting reserves,
and are the subject of this paper. In particular, for given productive and transmission
capacities, we identify ¯rms' opportunity costs of committing resources in the capac-
ity market, and hence, the costs of inducing full capacity commitment. Regulatory
issues such as the optimal choice of the reserve margin and the capacity de¯ciency rate
(which serves as a price-cap) are analyzed. From a welfare view-point, we also com-
pare the desirability of providing reserves either through capacity markets or through
the demand side (i.e. voluntary curtailments).
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Electricity markets, Capacity markets, PJM