  Liberalized electricity markets often include resource adequacy mechanisms
that require consumers to contract with generation resources well in advance of
real-time operations. While administratively defined mechanisms have most
commonly taken the form of a capacity obligation, efficient markets would
feature a broad array of arrangements adapted to the risk profiles and
appetites of market participants. This article considers how the financial
hedge embedded in alternative resource adequacy contract designs can induce
different responses from risk-averse investors, with consequences for the
resource mix and market structure. We construct a stochastic equilibrium model
describing a competitive market with incomplete risk trading and compute
investment equilibria under different contracting regimes. Two policy
recommendations result. First, to avoid creating inefficiency by crowding out
other forms of risk sharing, system operators should allow resources contracted
through other means to opt out of mandatory capacity mechanisms, with their
contribution to those requirements subtracted from administratively defined
demand curves. Second, if they wish to promote a single contractual form,
regulators should consider replacing existing option-like capacity mechanisms
with a shaped forward contract for energy. Beyond these recommendations, we
discuss the tension that liberalized systems face in seeking to promote both
reliability and competitive outcomes.
