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Investment vs. Refurbishment: Examining Capacity Payment Mechanisms Using Stochastic Mixed Complementarity Problems

Muireann A. Lynch and Mel T. Devine

Year: 2017
Volume: Volume 38
Number: Number 2
DOI: 10.5547/01956574.38.2.mlyn
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Abstract:
Capacity remuneration mechanisms exist in many electricity markets. Capacity mechanism designs do not explicitly consider the effects of refurbishment of existing generation units in order to increase their reliability. This paper presents a stochastic mixed complementarity problem to examine the impact of refurbishment on electricity prices and generation investment. Capacity payments are found to increase reliability when refurbishment is not possible, while capacity payments and reliability options yield similar results when refurbishment is possible. Final costs to consumers are similar under the two mechanisms with the exception of the initial case of overcapacity.



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.



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.



The Impact of Capacity Market Auctions on Wholesale Electricity Prices

Francisco Moraiz and Dominic Scott

Year: 2022
Volume: Volume 43
Number: Number 1
DOI: 10.5547/01956574.43.1.fmor
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Abstract:
The objective of this analysis is to shed light on the impact—on electricity prices and net costs borne by the consumer—of the introduction of the Capacity Market. The analysis uses the ‘surprise’ announcement of the introduction of a Capacity Market Early Auction to assess its impact on wholesale prices using the ‘difference-in-differences’ (did) method. Although we cannot exclude entirely the possibility of other drivers, our results suggest that the announcement of introduction of the Early Auction may have reduced the spread between peak and base prices by £0.84/MWh. This may be consistent with a reduction in wholesale revenues of about half the total value of the Capacity Market of £380 million. Our research is subject to a number of assumptions and accompanying caveats which we spell out.



The Integration of Variable Generation and Storage into Electricity Capacity Markets

Stan Zachary, Amy Wilson, and Chris Dent

Year: 2022
Volume: Volume 43
Number: Number 4
DOI: 10.5547/01956574.43.4.szac
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Abstract:
We show how to value both variable generation and energy storage to enable them to be integrated fairly and optimally into electricity capacity markets. We develop theory based on balancing expected energy unserved against costs of capacity procurement, and in which the optimal procurement is that necessary to meet an appropriate reliability standard. For conventional generation the theory reduces to that already in common use. Further the valuation of both variable generation and storage coincides with the traditional risk-based approach based on equivalent firm capacity. The determination of the equivalent firm capacity of storage requires particular care; this is due both to the flexibility with which storage added to an existing system may be scheduled, and also because, when any resource is added to an existing system, storage already within that system may be flexibly rescheduled. We illustrate the theory with an example based on the GB system.





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