Abstract
We analyze the effectiveness of a forward capacity market (FCM) with long-term contracts in an electricity market in the presence of a growing share of renewable energy. An agent-based model is used for this analysis. Capacity markets can compensate for the deteriorating incentive to invest in controllable power plants when the share of variable renewable energy sources grows, but may create volatile prices themselves. Capacity markets with long-term contracts have been developed, e.g. in the UK, to stabilize capacity prices. In our analysis, a FCM is effective in providing the required adequacy level and leads to lower cost to consumers and more stable capacity prices, as compared to a yearly capacity market. In case of a demand shock, a FCM may develop an investment cycle, but it still maintains security of supply. Its main effect on the power plant portfolio is more investment in peak plant.
Highlights
We analyze the effectiveness of a forward capacity market (FCM) in the presence of a growing share of intermittent renewable energy sources in the generation mix
If investment in renewable energy source (RES) based capacity by the competitive power generation companies is lower than the government target, the target investor will invest in additional RES capacity in order to meet the target even to the extent that the investor does not recover its costs in the market
The absolute value of the demand requirement (Dr) in MW for the current auction is based on four variables: the installed reserve margin (r), the expected peak demand (Dpeak) for the forward year, which is forecasted by extrapolating past peak demand values, the total capacity that already has long-term capacity contracts (CLT) and the total peak available capacity of renewable generation with renewable energy policy support (CRES)
Summary
We analyze the effectiveness of a forward capacity market (FCM) in the presence of a growing share of intermittent renewable energy sources in the generation mix. Eager et al (2012) use a system dynamics approach to study investment in thermal generation capacity in markets with high wind penetration In this model, the investment decision are based on net present value and a value at risk criterion to account for uncertainty. Botterud et al (2002) use a dynamic simulation model to analyze investment under uncertainty over the long-term None of these studies, considered the impact of a capacity mechanism on generation investment. The results from the model are an emergent property of the agents’ interactions with each other and their environment, the results typically do not follow an optimal path This allows us to study the possible evolution of the electricity market under conditions of uncertainty, imperfect information and non-equilibrium.
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