<mark>Although the precise form of the capacity market is not universally agreed upon, different types of CRMs were implemented worldwide</mark> to incentivize new entry, revenue, and resource adequacy. Strategic reserve refers to the mechanism of contracting selected dispatchable and flexible power plants that do not participate in the electricity market to be used in extreme situations of system stress and when the market price is close to the defined cap. Strategic reserves have been a relatively popular option in European markets, already deployed in Belgium, Sweden, Finland, and Poland (Keles et al., 2016). A centralized capacity market is another type of mechanism, where the regulator determines the capacity to procure, and the level of payments is based on auctions in which the operator clears the market in the order of the offers. These kinds of capacity markets have been introduced in, for example, PJM, ISO-NE, Colombia, and Ireland (Bhagwat, de Vries, et al., 2016). MISO and NYISO introduced voluntary capacity markets but with the possibility of bilateral capacity contracts or self-supply (Byers et al., 2018). It is also worth noting that energy-only markets also use non-market-based reserve procurement mechanisms to address any low reserve concern. The Australian National Electricity Market, for instance, introduced a ‘Reserve Trader’ mechanism at the start of the market in 1998 as a temporary/transition measure to guard against any potential lack of new entry. Although the market attracted sufficient new entry over the last 25 years since its start, the mechanism has however been retained to date as an emergency protocol.<sup>18</sup> CRMs still cause a series of controversies, also due to potential negative impacts and inefficiencies within the market. (Bublitz et al., 2019), provides an excellent review of CRMs experiences, including an evaluation of potential inefficiencies. PJM is a prominent example of the myriad of capacity market failures. As recently outlined by (McCullough et al., 2020), recent reforms of the capacity market increased market concentration over the past decade by removing the majority of PJM’s capacity from the competition, allowing for the extensive exercise of market power by individual suppliers to the point that capacity margin could reach 70% in 2040. (Bhagwat, Richstein, et al., 2016) mentions that due to future uncertainty, a market with strategic reserves may become unstable, causing high volatility with exercise price spikes.

# <mark>NEW PARADIGMS</mark>

<mark>Finally, we turn to the last group of proposals that call for disruptive changes in the electricity market design. This has been primarily led by Professor Paul Joskow from MIT, who, inspired by</mark> Oliver Williamson’s concepts of institutional adaptation, proposed the concept of hybrid markets based on the principles of ‘competition for the market’ that relies on market-based procurement for long-term PPAs (P. L. Joskow, 2022). (WRI & Resources for the Future, 2020) summarize the options for shifting towards hybrid markets. These include competitive procurement for long-term contracts grounded on resource planning, supplemental capacity remuneration support mechanisms, as well as short-term markets. These mark a more significant departure from the conventional wholesale spot market. The premise for such a significant change is that as energy prices may become more uncertain in the future, investors will find it more challenging to make substantial investments in VRE, which comprises almost entirely upfront capital costs. To achieve ambitious decarbonization goals, the volume and type of renewable energy investments required could be better supported by hybrid markets, which could provide more

> 18 Refer to the Australian Reliability and Emergency Reserve Trader mechanism page: <u>https://aemo.com.au/en/energy-systems/electricity/emergency-management/reliability-and-emergency-reservetrader-rert</u>

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