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Strategic Behaviour in a Capacity Market? The New Irish Electricity Market Design

Abstract:
The transition to a low-carbon power system requires growing the share of generation from (intermittent) renewables while ensuring security of supply. Policymakers and economists increasingly see a capacity mechanism as a way to deal with this challenge. Yet this raises new concerns about the exercise of market power by large players via the capacity auction. We present a new modelling approach that captures such strategic behaviour together with a set of ex ante empirical estimates for the new Irish electricity market design (I-SEM) - in which a single firm controls 44% of generation capacity (excluding wind). We find significant costs of strategic behaviour, even with new entry: In our baseline scenarios, procurement costs in the capacity auction are around 150-400 million EUR (or 40-100%) above the competitive least-cost solution. From a policy perspective, we also examine how market power can be measured and mitigated through auction design.

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Keywords: Capacity market, Strategic behaviour, Competitive benchmark analysis, Restructured electricity market, Auction design

DOI: 10.5547/01956574.40.SI1.jtei

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Published in Volume 40, The New Era of Energy Transition of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.

 

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