Capacity to spare? A cost-benefit approach to optimal spare capacity in electricity production

The Dutch government considers to contract spare capacity as a safety net to prevent blackouts. The study tries to answer the question on the optimal size of the safety net, using a social cost-benefit approach. The outcomes of this study suggest that the electricity market will not generate sufficient capacity to reach the social optimum. The optimum may be reached by contracting an additional 450 to 1,220 MW of spare capacity. The bandwidth reflects uncertainty about the expected level of competitiveness in the market. At this level, 9,000 to 16,000 MWh per year will remain unserved. This is two to three times the current amount, or 0.02 percent of annual demand. It is possible to complement spare capacity contracts with other instruments that guarantee security of supply, such as extensions of import capacity