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Policy Brief / Energy

Pradyumna Bhagwat

Capacity Mechanisms in Interconnected Markets

Author(s): BHAGWAT Pradyumna, DE VRIES Laurens J.

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  • Strategic reserves and capacity markets can improve the security of supply and contribute positively to consumer benefits if they are carefully conceived and managed.
  • The presence of an interconnector may negatively affect the effectiveness of a capacity market, depending on the relative size of the interconnection and the degree to which the consumption peaks coincide. The capacity ‘leakage’ benefits the neighbouring market in terms of lower prices and higher reliability, but it may also lead to import dependency.
  • A capacity market can crowd out generators in an interconnected energy-only zone. Hence, it may put pressure on neighbouring markets to implement a capacity mechanism as well.
  • In case the neighbouring zone decides not to implement a capacity market, a strategic reserve can also offset this crowding-out effect and thus lower the risk of investment cycles in generation capacity.