A two-dimensional adequacy mechanism for electricity markets with a high share of variable renewable sources to stimulate efficient investment and ensure reliability

Historically, power systems have been developed predominantly based on thermal or hydro resources, depending on the local resources availability and system needs. The distinct characteristics of these technologies shaped how adequacy requirements were defined, allowing systems to be classified as either capacity-constrained or energy-constrained. However, as variable renewable sources (VRS) such as wind and solar become increasingly dominant in system expansions, these one-dimensional approaches are no longer sufficient to ensure reliability or investment efficiency, due to the inherent uncertainty in resource availability and lack of dispatchability. Although some electricity markets already consider products related to energy and capacity dimensions independently, most adequacy mechanisms and market designs continue to focus on a single requirement — typically capacity — or are tailored to promote specific technologies. This paper aims to the ongoing debate on electricity market design by characterizing evolving adequacy requirements and proposing a redefinition of adequacy products that can induce efficient expansion. It emphasizes that adequacy products must be jointly designed and monitored across both the energy and capacity dimensions. The Brazilian power system, with its high share of hydropower and rapidly growing VRS participation, offers a relevant case study for these challenges and provides lessons that are broadly applicable to other contexts. The analysis shows that by aligning market products with multidimensional adequacy requirements, policymakers and regulators can avoid inefficient technological mandates, promote competitive neutrality, and support a more robust and cost-effective expansion of power systems in the decarbonization era. • In the decarbonization era, power systems requirements need to be recharacterized. • Adequacy mechanisms must consider jointly energy and power capacity dimensions. • Redefinition of adequacy products can induce efficient power system expansion. • Multidimensional adequacy products can avoid inefficient technological choices.