Generation Investment and Capacity Adequacy in Electricity Markets

One of the major challenges in restructured power systems is to maintain a level of generation capacity that ensures an acceptable level of certainty against power interruptions. A power market with a wellfunctioning spot market and long-term markets for allocation of risks between consumers and producers should in theory generate optimal investments in new power generation capacity, but this may not always be the case. In this paper we describe potential problems for adequate generation investments in electricity markets. We also discuss different policies that have been implemented and proposed to address the problem of capacity adequacy. Finally, we look at the experience so far with generation investment in some restructured electricity markets, focusing on Scandinavia and the United States.