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.

3-Party Covenant Financing Of ‘Semi-Regulated’ Pumped Hydro Assets

“…This collision between the energy-only market design and applied corporate finance has led various jurisdictions to introduce strategic reserves (e.g. Belgium, Finland, Germany, Sweden and Texas) where capacity payments are paid to a limited number of generation units within a designated strategic reserve, (Holmberg and Tangeras, 2023), or introduce broad-based capacity mechanisms, such as Great Britain. 8 Bublitz et al (2019) note that globally, organised capacity markets appear to have a growing role to overcome episodes of missing money.…”

Modelling of microgrids to insure resource adequacy in the capacity market

“…To assist producers, many electricity markets employ capacity mechanisms. The capacity mechanisms used in electricity markets around the globe have been reviewed in reference [8], along with the characteristics of strategies like the capacity market. The goal of capacity markets is to guarantee the supply of sufficient resources with a mix that can achieve the regulator's goal of reliability.…”