Generation Investment and Resource Adequacy in Electricity Markets

Abstract

This paper presents an overview of the issue of resource adequacy in general, and the specific problems presented by restructured markets for ensuring adequate investment in generation capacity. The theory of investment in ideal markets is contrasted with the actual behavior of investors in US markets in the past, and the potential for investment cycles in the future. The US experience with capacity markets, energy only markets and mandated reserve margins is summarized and contrasted. Theoretical models of markets, and consultant models that are based on the assumptions of economic theory, cannot be relied upon to provide reliable recommendations for effective policy decisions. The lack of high quality and impartial empirical work that would allow valid comparisons of the efficiency and effectiveness of different markets leaves regulators in the dark when choosing between resource adequacy mechanisms.

Keywords: Electricity, Generation, Resource Adequacy, Markets, Regulation

JEL Classification: G31, G38, L50, L51, L94, L98, Q40, Q48