ABSTRACT
This chapter explores that Capacity Markets are increasingly seen as the solution to the 'missing money' problem and slimming capacity margins. Traditionally, Capacity Markets have been seen as incentive mechanisms to induce supply to invest in sufficient generation to satisfy a reliability standard at least cost. Plans to introduce Capacity Markets in various European countries compel European Union institutions to consider both their impacts on the internal electricity market and the future of Demand Side Response (DSR). In Italy, the rationale for the introduction of a Capacity Market is to address a combination of problems with financing generating capacity in the absence of DSR and storage; the failure to co-ordinate investments in generation and transmission following the removal of a central entity; and the penetration of renewable sources of energy which increase price volatility, reduce market price levels and worsen the commercial attractiveness of conventional capacity.
