For several years, EPRI has been developing a multi-agent simulator for spot electricity markets called STEMS. We present here an extension, jointly developed by EPRI and EDF, of this simulator to handle investment decisions in new generation capacity. This extension is applied to a case study inspired from real market data, to demonstrate the use of these simulations for analyzing interactions between long and shortterm decisions of strategic profit-maximizing agents. We also use an elementary example to observe the impact of varying market structures, pertaining to new entry or to the level of forward contracting. Agent-based modeling provides a flexible framework able to deal with the complexity of real-world situations. Our view is that such agent-based simulations should henceforth become an essential component of the objective evaluation of candidate resource adequacy policies.

The recent blackouts in Italy and California have raised doubts on the ability of electricity markets to promote efficient investment in generation. Those crises affect the security of supply, which can be viewed as a public good. Several incentive mechanisms have therefore been proposed to ensure security of supply and are currently contemplated by public authorities in many countries. The aim of this paper is to analyse two of these incentive mechanisms that can be implemented by the regulator. We develop a principal-agent model with two types of generators, differentiated by their access to capital markets. We compare a capacity payment, which we model as a menu of incentive contracts with strategic reserves, which we model as a retention rule.

Market prices make it possible to realise returns on capital investments in the electricity sector, but these prices may not necessarily be politically or socially acceptable. As a result, explicit or implicit price caps may be established. If these caps are effective, they may result in loss of income and therefore discourage investors. To remedy this problem, several mechanisms have been proposed and put into place. The goal of this paper is not to perform an analysis of these initiator mechanisms for capital investment but, rather, to study an alternative. We show that this conceptually simple mechanism, which appears to correspond to the desires of producers and suppliers, is actually an illusion. Admittedly, the mechanism allows a single producer (or multiple producers with the same production mix) to recover its (their) costs despite the price cap. However, it does not allow certain technologies to be profitable. As a result, producers may be reluctant to invest in these technologies. This reluctance is more significant with the introduction of risk. The mechanism creates a distortion, moving money from peak to base technologies. Furthermore, it is not simple to implement. JEL Codes: Q48, L5 361