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  • Policy Brief
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Decarbonizing electricity requires re-evaluating capacity mechanisms

Many electricity markets authorize capacity payments to generators to secure sufficient supply, unintentionally favouring peaking technologies like oil and gas. New approaches are needed to ensure reliability without discouraging investment in low-carbon resources such as solar, wind and nuclear.

Messages for Policy

  • Mechanisms designed to guarantee sufficient electricity supply may have unintended consequences on resource mix.

  • Implementing capacity markets can shift the resource mix away from baseload and variable resources like nuclear and renewables, toward peaking technologies like oil and gas.

  • Regions relying on competitive markets for resource adequacy should work to ensure robust markets for risk-trading instruments.

  • Regions with explicit capacity requirements should consider a range of risks when designing those requirements.

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Further Reading

  • Cramton, P., Ockenfels, A. & Stoft, S. Capacity market fundamentals. Econ. Energy Env. Pol. 2, 27–46 (2013). Explains the rationale for and intent behind existing capacity market structures.

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  • D’Aertrycke, G., Ehrenmann, A., Ralph, D. & Smeers, Y. Risk Trading in Capacity Equilibrium Models. Cambridge Working Paper Economics 1757 (University of Cambridge, 2017).Defines several capacity investment models with different assumptions on market power and availability of risk trading mechanisms.

  • Ferris, M. & Philpott, A. Dynamic risked equilibria (Optimization Online, 2018).Establishes the need for complete markets in risk to achieve efficient outcomes in competitive markets.

  • Polzin, F., Egli, F., Steffen, B. & Schmidt, T. S. How do policies mobilize private finance for renewable energy?—A systematic review with an investor perspective. Appl. Energy 236, 1249–1268 (2019). Demonstrates that renewable deployment depends not just on expected returns but also on the risk associated with available revenue streams.

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Views expressed are not necessarily those of the Federal Energy Regulatory Commission. This research was supported, in part, by Northwestern University’s Center for Optimization and Statistical Learning.

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Correspondence to Jacob Mays.

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The authors declare no competing interests.

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Mays, J., Morton, D.P. & O’Neill, R.P. Decarbonizing electricity requires re-evaluating capacity mechanisms. Nat Energy 4, 912–913 (2019).

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