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  • We study the abilities of competitive markets to produce sucient energy capacities tomeet a xed energy demand. Renewable energy producers with stochastic outputs and novariable costs compete against conventional energy producers with deterministic, pollutantoutputs and increasing marginal costs. We nd that either market forces are strong enoughto serve the entire demand, or they are too weak such that the market fails and nothing isproduced. This crucially depends on the relative cost of renewable energy investments, suchthat relatively cheap renewable energy causes the market to fail. Welfare analyses show thatwith increasing levels of conventional energy pollution the ability of the market to producean ecient outcome further declines. As a policy implication, our ndings refute the use ofa strategic reserve as a blackout backstop solution. Instead, a capacity mechanism consistingof a tax-and-subsidy scheme can align the market outcome with the ecient solution for allpollution levels and relative costs of renewable energy capacities.
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