Abstract
In electricity markets around the world, the substantial increase of intermittent renewable electricity generation has intensified concerns about generation adequacy, ultimately driving the implementation of capacity remuneration mechanisms. Although formally technology-neutral, substantial barriers often exist in these mechanisms for non-conventional capacity such as electricity storage. In this article, we provide a rigorous theoretical discussion on design parameters and show that the concrete design of a capacity remuneration mechanism always creates a bias towards one technology or the other. In particular, we can identify the bundling of capacity auctions with call options and the definition of the storage capacity credit as essential drivers affecting the future technology mix as well as generation adequacy. In order to illustrate and confirm our theoretical findings, we apply an agent-based electricity market model and run a number of simulations. Our results show that electricity storage has a capacity value and should therefore be allowed to participate in any capacity remuneration mechanism. Moreover, we find the implementation of a capacity remuneration mechanism with call options and a strike price to increase the competitiveness of storages against conventional power plants. However, determining the amount of firm capacity an electricity storage unit can provide remains a challenging task.
Highlights
Our article sets an explicit focus on electricity storage, we review some literature on demand side management (DSM) due to strong analogies between these technologies
There exist, a few studies investigating the interdependencies between capacity remuneration mechanisms (CRMs) and electricity storage or DSM, which we present
Rather than the actual market design, much depends on the concrete specification of the CRM, which always creates a certain bias towards one technology or the other
Summary
The substantial increase of renewable electricity generation in countries around the world brings along new challenges for the appropriate design of electricity markets. Several European countries have started implementing different kinds of CRMs (Bublitz et al, 2019) All of these mechanisms typically aim to reduce the risks for new investments by offering capacity providers supplementary income on top of the earnings from selling electricity on the market. Applying derating factors essentially aims to base the remuneration on the capacity credit of storages, i.e., these units are only remunerated for the amount of firm capacity they are able to provide rather than for their nameplate (or nominal ) capacity Such an approach is suggested by Usera et al (2017), as it may help electricity storage to compete in CRMs as compared to treating them in the same way as conventional resources.
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