Addressing Adequacy Concerns with Contracts: Review of Past, Present and Possible Future

Abstract

Several papers propose using call options (i.e. a contract to sell energy at a pre-determined price in the future) as a mechanism to insure new investments and adequate capacity in electricity markets. Other papers have since extended on this idea. However, it is cumbersome for newcomers to get an overview of these capacity remuneration mechanism efforts, chiefly because the papers use different names (“reliability options”, “option contracts” and “forward reliability markets” to name a few) for what is the same mechanism in its basic form. This paper provides a review of these papers, presents an intuitive introduction to the basic underlying mechanism, and highlights the differences between the various approaches. In addition, this paper points out where the future research of this topic might be heading.