Comparing designs for resource adequacy in laboratory electricity markets

We compare generation capacity investment and unserved energy in experimental electricity markets under three designs: (1) an energy-only market serving as baseline, (2) an energy-only market with scarcity pricing where firms earn revenues from the provision of an additional product, reserves, and (3) a capacity market that rewards capacity investment and is followed by an energy-only market. Subjects in the experiments act as firms, choosing generation capacity and competing to meet electricity demand in the market. Based on simulation results from complementarity-based equilibrium models, our predictions suggest that an energy-only market incentivizes the lowest capacity investment, which is insufficient to satisfy peak electricity demand. Further, we expect the capacity market to promote more investment than the energy-only market with scarcity pricing, avoiding unserved energy across all demand scenarios. In contrast, the energy-only market with scarcity pricing experiences unserved energy during peak demand periods. In line with the predictions, we find that the experimental baseline leads to insufficient capacity investment to meet peak demand. The alternative designs encourage additional capacity investment, with firms in the capacity market generally investing in more generation capacity. Yet, both alternative designs are unable to satisfy peak electricity demand because their additional capacity falls short of expected levels. Further, unserved energy is reduced, but results are not statistically different under the alternative designs.