Ensuring reliable electricity supply in increasingly renewable power systems has prompted a
larger interest in capacity remuneration mechanisms (CRMs). However, national CRMs create
cross-border externalities whose magnitude and direction remain poorly understood. This
thesis develops a stylized two-zone equilibrium model to quantify cross-border effects (CBEs)
of divergent CRM designs. For capacity markets (CM) and strategic reserves (SR), with implicit
or explicit cross-border participation, it is studied how they affect investment, adequacy,
prices, and welfare across interconnected zones. Agents representing producers, consumers,
and an interconnector simultaneously optimize under social-welfare objectives and scarcity
pricing, solved via an ADMM-based mixed-complementarity formulation to match supply and
demand in this equilibrium model. A range of scenarios of CRM design combinations, with
each performing parameter sweeps for CRM size, measure shifts in firm capacity and variable
(wind, solar) capacity, energy not served, interconnector flows, and zonal costs and surpluses.

Key findings include: (1) unilateral capacity markets displace firm capacity away from an
EO-zone and SR-zone and significantly towards the CM-zone, which reduces autarky levels,
but with an increased reliance on imports do not necessarily result in lower resource adequacy;
(2) implicit and explicit foreign participation can yield equivalent outcomes in terms of resource adequacy, yet costs related to explicit participation could surpass those of implicit to reach the same resource adequacy targets; (3) strategic reserves raise overall investment and reduce unserved energy for both zones, without creating substantial adverse effects for neighboring zones; (4) linked capacity market and reserve designs can amplify capacity relocation beyond single-mechanism cases and (5) a zone implementing a CM can see its total social welfare (SW) decrease under influence of its associated costs, if its benefits are overly shared with neighboring zones at the expense of themselves.
These outcomes underscore the importance of reliable interconnection capacity, harmonized
market rules, and well-designed payment structures for mitigating CRM externalities. Continuous coordination of CRM parameters and cross-border participation frameworks is vital to balance national reliability goals with national and regional welfare effects. At the same time, we conclude there is no one-size-fits-all prescription for policymakers. They must, e.g., weigh the trade-off between free-riding on neighbors’ CRMs, potentially gaining heightened overall welfare at the expense of autarky and losing national generation businesses, or incurring additional costs to implement a comparable CRM that bolsters domestic security and distributes costs and benefits more equitably.