Electricity Capacity Markets.

• Date: 01 September 2023
• Author: Bialek, Sylwia

Electricity Capacity Markets, by Todd S. Aagaard and Andrew N. Kleit (Cambridge University Press, 2022). 300 pages, ISBN: 978-1108489652 hardcover, 9781108747424 paperback, ISBN: 9781108809832ebook.

Capacity markets--the markets in which the readiness of power plants, storage facilities, etc., to deliver electricity is traded with the goal of ensuring resource adequacy--have been the object of controversy in the US. Given the administrative character of these markets, their optimal design is non-trivial, resulting in frequent changes of the market rules. Because these markets also create substantial revenue, changes have the potential to significantly affect the energy mix. And there have been concerns that both the underlying design and some of the recent reforms of capacity markets create a major obstacle for low-carbon technologies, thus hampering climate goals.

In the light of these conflicts, understanding capacity markets--whether you like them or not--is necessary for staying abreast of energy sector developments. Currently, however, relevant debates tend to be confined to a narrow group of energy experts. A likely reason for these debates failing to reach a broader audience is their complexity. Capacity markets rarely find a comprehensive treatment: existing materials either cover their individual aspects of the markets (e.g., regulatory proceedings, materials circulated by market operators or economics papers) or discuss general principles of the markets (e.g., chapters in energy economics textbooks). The subject matter is technical and convoluted and a blizzard of abbreviations and jargon terms make the discussions even less comprehensible. That creates a potentially prohibitively high fixed cost for joining the debates around capacity markets.

This is where Aagaard and Kleit come to the rescue. Their book gently introduces readers to US capacity markets, guiding them step by step through the various aspects. Topics such as institutional setup, market design elements implemented in the markets' twenty years of history, and the arguments for implementing the markets in the first place are covered in a comprehensive yet accessible way. The book combines factual descriptions of the capacity markets' history and design details with the (rather skeptical) evaluation of the markets' role and functioning. It can be read sequentially, chapter by chapter, or used as a resource for individual topics. It requires no prior familiarity with...