Capacity market in Russia: Possibilities for new generation entry and cost of CRMs

Abstract

While many European countries are implementing different capacity remuneration mechanisms (CRMs) or capacity markets, the Russian electricity industry faces the consequences of the capacity market with CRMs, i.e. capacity oversupply. Russia introduced the capacity market and CRMs for new capacity construction in 2011. Ideally, old inefficient generation should have exited the market leaving new and efficient ones. However, high number of “must-run” power plants that cannot be excluded in the capacity auction and overestimated capacity demand have led to an oversupply of capacity. In this paper we estimate the capacity market clearing price based on sloping demand and supply functions as well as test the possibility of new efficient generation entry. The outcomes of the model are used to predict the consumer capacity price peak due to CRMs and to conclude on efficiency of implementing sloping capacity demand curve in capacity auctions.