Generation adequacy: Helping the market do its job

In response to concerns that competitive electricity markets may be subject to the development of an investment cycle, a number of adjustments to the market structure have been proposed for stabilizing investment in generating capacity. This paper reviews the advantages and disadvantages of these capacity mechanisms and presents a policy framework for selecting the most suitable capacity mechanism. The choice of capacity mechanism depends upon circumstances such as whether the market in question has a mandatory power pool and whether it is strongly interconnected to other markets. This analysis focuses specifically upon options for European markets, which typically are of the decentralized type (without mandatory power pools) and have significant exchanges with neighboring markets. These two factors complicate the implementation of a capacity mechanism.