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Crediting Wind and Solar Renewables in Electricity Capacity Markets: The Effects of Alternative Definitions upon Market Efficiency

As the penetration of variable renewable energy in electricity markets grows, there is increasing need for capacity markets to account for the contribution of renew-ables to system adequacy. An important issue is the inconsistent industry definition of capacity credits for resources whose availability may be limited, such as renewable generation. Inaccurate credits can subsidize or penalize different resources, and consequently distort investment between renewables and non-renew-ables, and also among different types and locations of renewables. Using Electric Reliability Council of Texas (ERCOT) data, we use a market equilibrium model to quantify the resulting loss of efficiency due to capacity credits alone and in combination with renewable tax subsidies and portfolio standards. Layering inaccurate capacity credits with existing US federal tax subsidies decreases efficiency as much as 6.3% compared to optimal capacity crediting under those subsidies. Compensating producers based on their marginal contributions to system adequacy, considering how renewable penetration affects the timing of net load peaks, can yield an efficient capacity market design.

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Keywords: Electricity Markets, Capacity Mechanisms, Renewable Generation, Wind, Solar

DOI: 10.5547/01956574.38.SI1.cbot

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Published in Volume 38, KAPSARC Special Issue of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.