An experimental study of investment incentives mechanisms

27 october 2009, from 10 am to 12 am.

GIS LARSEN, Campus de Fontenay aux Roses

Speaker : K. Staropoli, University Paris 1

Presentation :[pdf]

Abstract : There are doubts on the capacity of energy-only markets to produce the adequate incentives to generators to invest properly. Do they give incentives to invest in the right generation technology, at the locations in the network, and in the amount of capacity which is needed to satisfy a given reliability standard at least cost? This paper suggests to find alternatives to the “energy-only markets” situation where there is no additional incentive mechanism to the price of the energy spot market to guide investment behaviour. In fact, there are also various “capacity mechanisms” which aim at replacing the investment incentives that are provided by price spikes with a more stable incentive which reduces investment risks. However, in the market design arena, there is still no consensus today on the best way to proceed, as reflected by the different designs of capacity mechanisms that have been applied in practice and the debates on new mechanisms that are still going on among academics (De Vries 2004; Vazquez et al. 2002; Perrez Arriaga et al. 2006; Ehrenmann, Smeers 2008). We thus aim at assessing the efficiency properties of one of these mechanisms: the “forward capacity market“ (FCM) initially proposed by Cramton and Stoft (2006) and Joskow (2006) and recently applied in New England. This mechanism has been designed taking into account the main drawbacks that have been experienced with other capacity mechanisms but as far as we know, its own performances have still not been analytically or empirically assessed.

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