CAPACITY MECHANISMS DISTORT POWER MARKETS

Certain markets have introduced measures to ensure investment in capacity. In most cases, capacity mechanisms are a barrier to commoditization and represent a shift from the market vision that predominated in the liberalization agenda of the 1990s. Capacity mechanisms represent a fundamental distortion of the market, but may be necessary because governments are unwilling to take the steps needed for an effective commoditized market to emerge. The path forward appears to involve institution of capacity mechanisms with the following characteristics:

- Least damaging. Policy-setters with a view to designing workably competitive power markets would institute mechanisms that interfere only minimally with energy markets.
- Opportunities for sunsets. If credibility returns to the commoditization model, if demand-side participation in markets is enabled, and if supply constraints are relieved, governments could phase out capacity mechanisms.

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