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Working Paper No. 1387

Strategic Reserves versus Market-Wide Capacity Mechanisms

Working Paper
Holmberg, Pär and Thomas Tangerås (2021). “Strategic Reserves versus Market-Wide Capacity Mechanisms”. IFN Working Paper No. 1387. Stockholm: Research Institute of Industrial Economics (IFN).

Pär Holmberg, Thomas Tangerås

Many electricity markets use capacity mechanisms to support generation owners. 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 different electricity markets around the world. We argue that strategic reserves, if correctly designed, are likely to be more efficient than market-wide capacity mechanisms. This is especially so in electricity markets that rely on substantial amounts of intermittent generation, hydropower, and energy storage whose available capacity varies with circumstances and is difficult to estimate.

Pär Holmberg

+46 (0)8 665 4559
+46 (0)72 511 6866

Thomas Tangerås

+46 (0)8 665 4526
+46 (0)70 727 5448