The Political Economy of Long-Term Generation Adequacy: Why an ICAP Mechanism is Needed as Part of Standard Market Design

In theory, energy and ancillary services markets alone can provide incentives for investment in electricity supplies. However, they can only do this by subjecting consumers to price volatility, price levels, supply shortages, and a level of risk to reliability that customers and policymakers would find unacceptable. If, given the political realities of the electricity market, prices lack the ability to move up and down as necessary to induce investment when capacity tightens, then an explicit capacity obligation is needed to signal capacity shortages (and surpluses) and induce investment when appropriate.