Short term clearing of capacity markets: An alternative approach to capacity pricing

Abstract

In the presence of increasing penetration from renewable energy sources, several control areas in Europe and the US have introduced Capacity Remuneration Mechanisms (CRMs) to ensure sufficient investment in firm electricity generation capacity. However, due to their long-term focus, these mechanisms are typically uncoupled from short-term electricity markets. We introduce a new CRM design, which involves shortterm clearing of a market for generation capacity in parallel with that of the wholesale electricity market. The proposed CRM allows for participation of capacity providers from both generation and demand side. Also, emerging technologies that were not able to participate in existing CRMs due to the longterm nature of those markets (e.g., storage) are able to participate in the proposed market for generation capacity. The proposed CRM is shown to satisfy the competitiveness, fairness and energy security principles defined by the European Commission. Finally, our analysis shows that the proposed CRM can ensure supply adequacy at a lower cost when compared to rival designs, by taking advantage of daily and seasonal variability in system demand.