An Experimental Study of Investment Incentives Mechanisms in the Electricity Industry

Abstract: Since electric power consumption and generation availability are highly uncertain, public authorities have traditionally determined a given reliability level above which it was considered as uneconomical from the society point of view to further invest. The investment decisions are now taken in a competitive environment and have to be sufficiently profitable for the generators.. Investing such that a relatively high reliability level is satisfied also implies expectations of rather high energy prices for the investors. It obviously questions their sustainability from a political and societal point of view, all the more as the risk premium that are required by competitive agents to invest in generation units that should run only once or twice per year also contributes to inflate prices. It suggests to find alternatives to these “energy-only markets” situation. This paper aims at assessing the efficiency properties of one of these mechanisms: the “forward capacity market". This mechanism has been designed taking into account the main drawbacks that have been experienced with other capacity mechanisms but as far as we know, its own performances have still not been analytically or empirically assessed. The results we obtain show that this mechanism leads the correct level of investment. On the contrary for a "energy-only markets" situation, the level of investment is not sufficient to have the adequate level of production for extra-high demand period.