Equilibrium Supply Security in a Multinational Electricity Market with Renewable Production

An increasing reliance on variable renewable energy has raised concern about system ability to continuously satisfy electricity demand. This paper examines countries’unilateral incentives to achieve supply security through capacity reserves and market integration in a multinational electricity market. Capacity reserves protect consumers against blackouts and extreme prices, but distort the market. Market integration reduces supply imbalances, but requires network investment. Equilibrium capacity reserves can be too high or low, but network investment is always insu¢ cient relative to the total welfare maximizing level. Capacity reserves are smaller when there are …nancial markets or when aimed at solving domestic supply constraints.