Capacity mechanisms and performance incentives: avoiding the « money for nothing» problem

Abstract

Since their early implementation, capacity mechanisms have overlooked, or at least paid insufficient attention, to the firmness dimension of the security-of-supply problem. These regulatory instruments have not only to guarantee that sufficient capacity will be in place in the future, but also that these resources will be actually available in the short term to overcome scarcity conditions. Capacity mechanisms must pursue this objective through a proper design, involving either constraints or specific guarantees on the quantity that can be traded by each agent or performance incentives that expose committed resources to significant financial penalties in case of underperformance. Through the analysis of recent experiences on both sides of the Atlantic, this article highlights current trends in international regulation and provides guidelines for the implementation of these firmness-oriented schemes.