LAUSR

Abstract European electricity markets are characterised by a multitude of (mainly national) approaches for ensuring security of supply. Although concerns regarding possible interaction effects between different market designs have been raised occasionally, the scientific research on capacity remuneration mechanisms (CRMs) primarily focusses on different design options in single markets. The research concerning possible spsill-over effects, positive or negative, in adjacent markets is lagging behind. This is the case for the effects of CRMs as well as for the effects of insufficient investment incentives. We address both topics in this paper. Specifically, we analyse the effects of price caps in two interconnected markets. Additionally, we analyse the effects of capacity payments meant to counter the deadweight losses triggered by the price restrictions. Although we find no indication that price caps or capacity payments in one market have (serious) negative effects on neighbouring markets, being connected to other markets can worsen the deadweight losses induced by insufficient investment. Also, capacity mechanisms might be less effective than in isolated markets. Finally, in the analysed set-up we find no indication that efforts to ensure security of supply in one market support neighbouring markets with insufficient investment incentives.