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What Moves the Ex Post Variable Profit of Natural-Gas-Fired Generation in California?

Chi-Keung Woo, Ira Horowitz, Jay Zarnikau, Jack Moore, Brendan Schneiderman, Tony Ho, and Eric Leung

Year: 2016
Volume: Volume 37
Number: Number 3
DOI: 10.5547/01956574.37.3.cwoo
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Abstract:
We use a large California database of over 32,000 hourly observations in the 45month period of April 2010 through December 2013 to document the ex post variable profit effects of multiple fundamental drivers on natural-gas-fired electricity generation. These drivers are the natural-gas price, system loads, nuclear capacities available, hydro conditions, and renewable generation. We find that profits are reduced by increases in generation from nuclear plants and wind farms, and are increased by increases in the natural-gas price and loads. Solar generation has a statistically insignificant effect, although this will likely change as solar energy increases its generation share in California's electricity market. Our findings support California's adopted resource adequacy program under which the state's load-serving entities may sign long-term bilateral contracts with generation developers to provide sufficient revenues to enable construction of new natural-gas-fired generation plants.



Reliability in Multi-regional Power Systems: Capacity Adequacy and the Role of Interconnectors

Simeon Hagspiel, Andreas Knaut, and Jakob Peter

Year: 2018
Volume: Volume 39
Number: Number 5
DOI: 10.5547/01956574.39.5.shag
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Abstract:
Based upon probabilistic reliability metrics, we develop an optimization model to determine the efficient amount and location of firm generation capacity to achieve reliability targets in multi-regional electricity systems. A particular focus lies on the representation and contribution of transmission capacities as well as variable renewable resources. Calibrating our model with a comprehensive dataset for Europe, we find that there are substantial benefits from regional cooperation. The amount of firm generation capacity to meet a perfectly reliably system could be reduced by 36.2 GW (i.e., 6.4%) compared to an isolated regional approach, which translates to savings of 14.5 bn EUR. Interconnectors contribute in both directions, with capacity values up to their technical maximum of close to 200%, while wind power contributions are in the range of 3.8-29.5%. Furthermore, we find that specific reliability targets heavily impact the efficient amount and distribution of reliable capacity as well as the contribution of individual technologies.Keywords: Reliability of supply, Capacity adequacy, Multi-regional power system, Interconnector, Variable renewable energy



Impact of Coordinated Capacity Mechanisms on the European Power Market

Michael Bucksteeg, Stephan Spiecker, and Christoph Weber

Year: 2019
Volume: Volume 40
Number: Number 2
DOI: 10.5547/01956574.40.2.mbuc
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Abstract:
There is an ongoing debate on the introduction of capacity markets in most European countries while a few of them have already established capacity markets. Since the implementation of independent national capacity markets is not in line with the target of a pan-European internal electricity market we investigate the impacts of uncoordinated capacity markets compared with coordinated capacity markets. A probabilistic approach for the determination of capacity requirements is proposed and a European electricity market model (E2M2s) is applied for evaluation. The model simultaneously optimizes investments and dispatch of power plants. Besides the impact on generation investments, market prices and system costs we analyze effects on production and security of supply. While coordinated capacity markets reveal high potentials for cross-border synergies and cost savings, uncoordinated and unilateral implementations can lead to inefficiencies, in particular free riding effects and endanger security of supply due to adverse allocation of generation capacity.



Ensuring Capacity Adequacy in Liberalised Electricity Markets

Nicolas Astier and Xavier Lambin

Year: 2019
Volume: Volume 40
Number: Number 3
DOI: 10.5547/01956574.40.3.nast
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Abstract:
This paper studies wholesale electricity markets where an exogenous price cap is enforced, compromising both short- and long-term incentives. To guarantee capacity adequacy, policy-makers may provide support for generation through a capacity remuneration mechanism (CRM) and/or encourage demand response (DR). Such mechanisms are formalised within a common simple analytical framework, clarifying how these mechanisms relate to each other. We then divide them into two categories, depending on whether their implementation requires transactions to be made based explicitly on spot prices higher than the price cap. While mechanisms that keep implicit these high marginal costs are likely to be preferred from a political perspective, they also appear to be less efficient. If they are to be implemented nonetheless, we suggest that the price cap should be set higher than the marginal cost of the most expensive plant, and highlight that challenges for demand-response integration in CRMs remain.



Cross-border Effects of Capacity Remuneration Schemes in Interconnected Markets: Who is Free-riding?

Xavier Lambin and Thomas-Olivier Léautier

Year: 2019
Volume: Volume 40
Number: Number 6
DOI: 10.5547/01956574.40.6.xlam
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Abstract:
We study the welfare impacts of domestic support schemes for generation capacity when energy markets are interconnected. We find that if transmission system operators (TSOs) can't reduce export capacity and neighbors stay energy-only, a capacity market is ineffective unless transmission capacity is small. If TSOs can reduce export capacity, the capacity market attracts investments and Security of Supply (SoS) of non-domestic markets shrink. A neighboring energy-only or strategic reserve market will thus be prejudiced in the long-run and may have to implement a capacity market as well in order to meet its SoS standard. Hence, capacity markets may spread in Europe thanks to their negative cross-border effect on investment incentives. This is in sharp contrast with the conventional wisdom, based on short-term arguments, that energy-only markets will free-ride the SoS provided by neighboring capacity markets. Our conclusions urge for the harmonization of capacity remuneration schemes across Europe.



Optimal Allocation of Variable Renewable Energy Considering Contributions to Security of Supply

Jakob Peter and Johannes Wagner

Year: 2021
Volume: Volume 42
Number: Number 1
DOI: 10.5547/01956574.42.1.jpet
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Abstract:
Electricity markets are increasingly influenced by variable renewable energy such as wind and solar power, characterized by a pronounced weather-induced variability and imperfect predictability. As a result, the evaluation of the capacity value of variable renewable energy, i.e., its contribution to security of supply, gains importance. This paper develops a new methodology to endogenously determine the capacity value in large-scale investment and dispatch models for electricity markets. The framework allows balancing effects to be accounted for that arise due to the spatial distribution of generation capacities and interconnectors. The practical applicability of the methodology is shown with an application for wind power in Europe. We find that wind power can substantially contribute to security of supply in a decarbonized European electricity system in 2050, with regional capacity values ranging from 1-40%. Analyses that do not account for the temporal and spatial heterogeneity of the contribution of wind power to security of supply therefore lead to inefficient levels of dispatchable back-up capacity. Applying a wind power capacity value of 5% results in an overestimation of firm capacity requirements in Europe by 66 GW in 2050. This translates to additional firm capacity provision costs of 3.8 bn EUR per year in 2050, which represents an increase of 7%.



Cross-border Effects of Capacity Remuneration Mechanisms: The Swiss Case

Florian Zimmermann, Andreas Bublitz, Dogan Keles, and Wolf Fichtner

Year: 2021
Volume: Volume 42
Number: Number 2
DOI: 10.5547/01956574.42.2.fzim
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Abstract:
In this article, cross-border effects of different market design options are analyzed using Switzerland, which is strongly interconnected to larger neighboring markets, as a case study. An investigation is conducted with an agent-based model where in one scenario, all market designs are represented according to the current legislation, and in another, energy-only markets (EOM) are assumed in all considered countries. The results show that wholesale electricity prices are highly dependent on the chosen market design and in the annual average are up to 27% higher in the EOM scenario. Due to expected larger interconnector capacities, this increase is evident in all simulated markets. Furthermore, the results indicate that the planned market design changes in the neighboring countries decrease investments in Switzerland. However, generation adequacy is still guaranteed due to the high Swiss hydropower storage capacity. Our results suggest that, under the current circumstances, a domestic mechanism in Switzerland is not required.



A Survey of Capacity Mechanisms: Lessons for the Swedish Electricity Market

Par Holmberg and Thomas Tangeras

Year: 2023
Volume: Volume 44
Number: Number 6
DOI: 10.5547/01956574.44.6.phol
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Abstract:
Many electricity markets use capacity mechanisms to support producers. Capacity payments can mitigate imperfections associated with "missing money" in the spot market and solve transitory capacity shortages caused by investment cycles, regulatory changes, or technology shifts. We discuss capacity mechanisms used in electricity markets around the world. We argue that correctly designed strategic reserves are likely to be more efficient than market-wide capacity mechanisms in jurisdictions that rely on substantial amounts of variable renewable energy and hydro power for electricity supply, such as Sweden.





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