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A Survey of Capacity Mechanisms: Lessons for the Swedish Electricity Market

Abstract:
Many electricity markets use capacity mechanisms to support producers. Capacity payments can mitigate imperfections associated with "missing money" in the spot market and solve transitory capacity shortages caused by investment cycles, regulatory changes, or technology shifts. We discuss capacity mechanisms used in electricity markets around the world. We argue that correctly designed strategic reserves are likely to be more efficient than market-wide capacity mechanisms in jurisdictions that rely on substantial amounts of variable renewable energy and hydro power for electricity supply, such as Sweden.

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Keywords: Capacity mechanism, Capacity market, Strategic reserve, Resource adequacy, Wholesale electricity market

DOI: 10.5547/01956574.44.6.phol

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Published in Volume 44, Number 6 of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.

 

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