Reforms to Solve Sweden’s Energy Investment Challenge

This research paper analyzes necessary reforms to achieve the objectives of environmentally sustainable, reliable, and cost-efficient electricity supply. Two conclusions are that prices to a larger extent must reflect the resource constraints and that investment risk must decrease.

Project manager

Pär Holmberg

+46 (0)8 665 4559
+46 (0)72 511 6866
par.holmberg@ifn.se

Project participants

Thomas Tangerås, IFN

A Survey of Capacity Mechanisms: Lessons for the Swedish Electricity Market

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.