Capacity Market Fundamentals
Peter Cramton, Axel Ockenfels and Steven Stoft ,
( 2 )
Economics of Energy & Environmental Policy, 2:2

Electricity capacity markets work in tandem with electricity energy markets to ensure that investors build adequate capacity, in line with consumer preferences for reliability. The need for a capacity market stems from several market failures. One particularly notorious problem of electricity markets is low demand flexibility. Most customers are unaware of the real time prices of electricity, have no reason to respond to them, or cannot respond quickly to them, leading to highly price-inelastic demand.

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