Electricity markets have had their problems: price spikes, market power, overbuilding, under-investment—all caused by attempts to use spot markets with flawed demand to solve the adequate-capacity problem. Electricity "experts" are fond of saying:
1. "Competitive spot markets induce optimal capacity."
This is meant as a reply to engineers and regulators who say
2. "Electricity markets need help building optimal (adequate) capacity."
But the word "optimal," in result #1, has nothing to do with "optimal" in concern #2. Result #1 is actually true only under the strict assumption that capacity is more than adequate and provides 100% protection from a supply shortfalls. Then, result #1 tells us, the spot market will build capacity not for reliability, but to the point where long- and short-run marginal costs are equal. This confusion has lasted 10 years. It's time for some "experts" to take a peak at an undergrad econ text.
Market's can help...
