Abstract
In recent years, electricity markets have been characterized by a growing share of fluctuating renewable energies, which has increased concerns about the security of electricity supply. As a consequence, existing market designs are adapted, and new capacity remuneration mechanisms are introduced. However, these mechanisms entail new challenges, and it is disputed whether they are indeed needed. In this article, an overview of the current debate on the necessity of capacity remuneration mechanisms is provided. Furthermore, initial experiences of real-world implementations are discussed, and common findings in the literature, categorized by their economic implications, are derived. Finally, shortcomings in existing research and open questions that need to be addressed in future works are pointed out.
Highlights
A reliable electricity system remains one of the main objectives of energy market regulators, especially after liberalizing the sector, whereas market participants are responsible for investments in supply capacities
Even though no agreement is found in the literature on the fundamental need for capacity remuneration mechanisms (CRMs), recent developments have to such an extent cast doubt on the effectiveness of an energy-only market (EOM) that in many countries politicians deem the introduction of such mechanisms necessary
Auer and Haas (2016) even argue that the introduction of capacity payments ruins market competition, meaning that flexibility options would not be exploited, leaving their development only in the hands of the regulator. Even though these theoretical findings pose a clear disadvantage for CRMs, practical experiences indicate that decision makers seem to be aware of this issue as, for example in the USA, CRMs explicitly include financial support for flexible resources, which in turn lead to a rise of these capacities (Rious et al, 2015)
Summary
A reliable electricity system remains one of the main objectives of energy market regulators, especially after liberalizing the sector, whereas market participants are responsible for investments in supply capacities. A reliable electricity system needs to be reached at reasonable costs for end consumers while at the same time greenhouse gases and other emissions are limited to a certain level These three targets of electricity market regulation—reliability, sustainability, and affordability— are commonly named the energy trilemma (Ang et al, 2015; Hawker et al, 2017), as an efficient balance between these oftentimes conflicting targets is difficult to find and achievable only by accepting trade-offs. The theoretical perspective considers the assessment of the impacts of different design options (Section 4) on regulatory targets, such as generation adequacy and RES integration The review of the latter perspective will be carried out in focusing on the qualitative discussion of limitations and benefits of each market design option, as well as on the model-based analysis of impacts on different criteria, e.g., market welfare, security of supply or incentivizing flexibility. The main common findings are discussed, open questions with which researchers are currently confronted are pointed out, and a set of policy implications is derived (Section 5)
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