Benefits of Clearing Capacity Markets in Short Term Horizon: The Case of Germany

Abstract

Capacity Remuneration Mechanisms are widely accepted mechanisms to ensure adequate supply capacity for electrical energy systems. Most capacity market designs are focused on long term horizons. We develop an optimization-based framework for clearing the capacity market over a short-term horizon. Participation strategy for generation units with firm capacity based on long-run marginal pricing is analyzed. Based on a German case study, we compare three different market frameworks: a proposed short-term capacity clearing process, a long-term capacity clearing process, and an electricity-only market. Results show that, under perfect competition assumptions, generation units that are necessary to maintain the level of supply adequacy deemed by the TSO, are able to recover their total costs under both short-term and long-term clearing, while the energy-only approach cannot ensure long-term supply adequacy. We also show that clearing the capacity market in short term horizons will decrease the cost of ensuring adequate supply by about 28 %.