Capacity Mechanisms and the Technology Mix in Competitive Electricity Markets
Author | : Pär Holmberg |
Publisher | : |
Total Pages | : |
Release | : 2019 |
ISBN-10 | : OCLC:1159118969 |
ISBN-13 | : |
Rating | : 4/5 (69 Downloads) |
Download or read book Capacity Mechanisms and the Technology Mix in Competitive Electricity Markets written by Pär Holmberg and published by . This book was released on 2019 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: Capacity mechanisms are increasingly used in electricity market design around the world yet their role remains hotly debated. In this paper, we introduce a new benchmark model of a capacity mechanism in a competitive electricity market with many different generation technologies. We consider two policy instruments, a wholesale price cap and a capacity payment, and show which combinations of these instruments induce socially-optimal investment by the market. Changing the price cap or capacity payment affects investment only in peak generation plant, with no equilibrium impact on baseload or mid-merit plant. We obtain a rationale for a capacity mechanism based on the internalization of a system-cost externality - even where the price cap is set at the value of lost load. In extensions, we show how increasing renewables penetration enhances the need for a capacity mechanism, and outline an optimal design of a strategic reserve with a discriminatory capacity payment.