An increasing share of intermittent renewable generation and reduced profitability of conventional power generation has led to a growing concern for capacity adequacy in the Nordic electricity market (Nord Pool market area). It does not make sense to assess capacity adequacy for each country separately in the Nord Pool market area as it is highly integrated in terms of both interconnector capacity and market integration. Capacity challenges are rarely isolated to one country or bidding zone. This report analyses what market solutions may be used to manage capacity adequacy in the Nord Pool market area, and how an efficient transition to adequate market solutions could be achieved. The main analysis reveals several measures that would strengthen price formation and cost recovery in the Nord Pool market area, although in general, the market is already highly liquid and well-functioning.

Do current electricity market designs ensure a sufficient electricity supply at all times? This topic is currently the subject of intense debate across Europe, and several major countries such as Germany, the UK, France and Italy have decided that additional measures – so-called capacity remuneration mechanisms - are needed to supplement current market designs. This report describes and analyses the advantages and disadvantages of a range of measures proposed or currently implemented across Europe, and includes both best estimates of how the implementation of these measures will impact Nordic electricity prices as well as recommendations to the Nordic countries regarding a cost-efficient path to ensuring the Nordic security of supply.

In this paper, we study the problem of long-term capacity adequacy in electricity markets. Two investment incentive mechanisms, Capacity obligations and Reliability contracts, are analyzed and compared to the benchmark design, the energy-only market. We use the dynamic programming method and real option theory to develop two dynamic models that enable one to assess the optimal market design for ensuring sufficient generation capacity to meet future demand at efficient cost (the deterministic model) and to analyze the optimal timing of investments when uncertainties in future load and fuel prices are considered (the stochastic model). The effects of different factors on investment strategies, such as the pricing of CO2 and differences between construction delays and cost structures of the new technologies, are also analyzed. The numerical results show that: (1) the reliability contract scheme would be the more cost-efficient mechanism, ensuring the long term system adequacy and encouraging earlier and adequate new investments in the system, compared to the capacity obligation method which would result in over-investment and price manipulations; (2) short lead time technology would be preferred with the capacity obligation design, while cost competitive technology would be chosen with the reliability contract scheme; (3) the pricing of CO2 and the taking into account of uncertainties would affect investment strategies but would have no impact on the effectiveness of the reliability contracts scheme.