Equilibrium Pricing with Duality-Based Method: Approach for Market-Oriented Capacity Remuneration Mechanism

Perica Ilak,Lin Herenčić,Ivan Rajšl,Željko Tomšić,Sara Raos

doi:10.3390/en14030567

Abstract

The crucial design elements of a good capacity remuneration mechanism are market orientation, insurance of long-term power system adequacy, and optimal cross-border generation capacity utilization. Having in mind these design elements, this research aims to propose a financially fair pricing mechanism that will guarantee enough new capacity and will not present state aid. The proposed capacity remuneration mechanism is an easy-to-implement linear program problem presented in its primal and dual form. The shadow prices in the primal problem and dual variables in the dual problem are used to calculate the prices of firm capacity which is capacity needed for long-term power system adequacy under capacity remuneration mechanism. In order to test if the mechanism ensures sufficient new capacity under fair prices, the mechanism is tested on the European Network of Transmission System Operators for Electricity (ENTSO-E) regional block consisting of Austria, Slovenia, Hungary, and Croatia with simulation conducted for a period of one year with a one-hour resolution and for different scenarios of the credible critical events from a standpoint of security of supply; different amounts of newly installed firm capacity; different short-run marginal costs of newly installed firm capacity; and different capacity factors of newly installed firm capacity. Test data such as electricity prices and electricity load are referred to the year 2018. The results show that the worst-case scenario for Croatia is an isolated system scenario with dry hydrology that results with high values of indicators expected energy not served (EENS), loss of load expectation (LOLE), and loss of load probability (LOLP) for Croatia. Therefore, new capacity of several hundred MW is needed to stabilize these indicators at lower values. Price for that capacity depends on the range of installed firm capacity and should be in range of 1000–7000 €/MW/year for value of lost load (VoLL) in Croatia of 1000 €/MWh and 3000–22,000 €/MW/year for VoLL of 3100 €/MWh that correlates with prices from already established capacity markets. The presented methodology can assist policymakers, regulators, and market operators when determining capacity remuneration mechanism rules and both capacity and price caps. On the other hand, it can help capacity market participants to prepare the most suitable and near-optimal bids on capacity markets.

Highlights

This research contributes a duality-based method for equilibrium pricing
It systematically and transparently determined the price of a firm capacity based on the shadow pricing in the dual problem
A capacity remuneration mechanism whose design is based on the proposed method is transparent and market oriented

Summary

Introduction

There are a lot of existing power plants that are needed in very few periods and generally have factor These power plants with rather high marginal costs cannot cover long term costs in energy-only markets. A good capacity remuneration mechanism (CRM) ensures long-term power system adequacy, optimal cross-border generation capacity utilization, and market orientation [2]. It financially values firm capacity (FC) and encourages sufficient capacity to remain active or attracts investments in new capacity without undermining the competitiveness of existing electricity markets (forward, day-ahead, intra-day, and balancing markets).

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Conclusion