Capacity remuneration mechanisms and the transition to low-carbon power systems

Abstract

Market designs in their current form are facing challenges triggered by the increase of injection from renewable energy sources (RES). Insufficient remuneration of conventional generators in an energy-only market may lead to inadequate generation mixes to cover peak demands and balance intermittent RES injection. Various corrective actions to the market designs are discussed, amongst them capacity remuneration mechanisms (CRMs). In this paper, a model is applied to compare the outcome of an energy-only market, strategic reserves and a capacity market. The comparison is done based on total cost paid to the electricity generators, installed capacities and occuring load shedding. The total costs are split up into energy-based payments (e/MWh), subsidies for RES and capacity-based payments (e/MW). The results show that origin of remuneration change with the chosen market design and lead to different generation mixes. Total cost increase with a CRM. However, taking into account load shedding, the increase of cost must be weighted with indirect costs of energy non-served.