Econonomics of Energy and Environmental Policy

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Capacity Markets - Lessons Learned from the First Decade

Capacity markets were introduced in the U.S. in the late 1990s as a means to ensure "resource adequacy" in liberalized electricity markets where generation must be built by merchant investors rather than regulated entities. This paper provides a general introduction to these markets: why they exist, how they function, how well they have performed in their first decade of operation, and the current challenges they face. It shows that capacity markets can work to meet their objectives but will need to address various design challenges over the coming years. Keywords: Capacity markets, Resource adequacy, Liberalized electricity markets
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JEL Codes:L94: Electric Utilities, D02: Institutions: Design, Formation, Operations, and Impact, L51: Economics of Regulation

Keywords: Capacity markets, Resource adequacy, Liberalized electricity markets

DOI: 10.5547/2160-5890.2.2.1

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Published in Volume 2, Number 2 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.


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