Econonomics of Energy and Environmental Policy

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Resource Adequacy with Increasing Shares of Wind and Solar Power: A Comparison of European and U.S. Electricity Market Designs

We raise the question if improvements to current energy-only markets are sufficient to maintain resource adequacy in electricity markets or whether the rapid increase in wind and solar power gives stronger arguments for additional capacity mechanisms. A comparative analysis between Europe and the United States reveals some fundamental differences, but also many similarities in electricity market design on the two continents. We provide a list of general and specific recommendations for improved electricity markets and argue that lessons can and should be learned in both directions. The key to achieve a market-compatible integration of renewable energy is to focus on correct price formation in the short-term. Increased demand-side participation, improved pricing during scarcity conditions, and a transition from technology-specific subsidies of renewables towards adequate pricing of carbon emissions are important measures towards this end. In contrast, an increasing reliance on administrative capacity mechanisms would bring the industry back towards the centralized integrated resource planning that prevailed at the outset of electricity restructuring more than 25 years ago.
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Keywords: Electricity Market Design, Resource Adequacy, Renewable Electricity Generation, Europe, United States, Price Formation, Energy-Only Markets, Capacity Mechanisms

DOI: 10.5547/2160-5890.9.1.abot

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Published in Volume 9, Number 2 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.


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