Supply Adequacy Issues in Renewable Energy and Hydro-Based Power Systems

Abstract

Supply adequacy represents the systems ability to meet demand on an extended time scale in view of the inherent fluctuation and uncertainty in demand and supply, the non- storability of power and the lead time inherent in capacity additions. With auction based short term spot markets, spot prices should theoretically provide the correct economic signals for ensuring supply adequacy and the optimal expansion of generation. Increasing demand and therefore increasing imbalance between supply and demand should result in spot- prices increases. This in turn should create incentives for investors to construct new plants. Furthermore, the spot market revenues should be able to cover investment and operations costs optimally. Unfortunately it has been quite problematic in many cases to implement the above paradigm in practice. While it may be conceptually correct as a part of applying economic theory to electricity pricing, its actual implementation has been difficult. Problems, in particular, have appeared and may appear in power systems with significant share of hydro-power resources and in small-scale power systems. The mitigation of such problems is discussed and the possible associated methodology. For instance, it is well known that electricity spot prices in hydro-based power systems are highly volatile. Therefore they do not give clear and simple economic signals for new generation. Spot price volatility depends heavily on hydrological conditions. Hydropower systems generally have a range of different sizes of reservoirs and highly variable natural inflow. The reservoir sizes may range from large multi- year storage capacity reservoirs to small intra-day storage ponds. With ample inflow of water under "wet" hydro conditions and with almost full reservoirs, spot prices may be very low or almost zero for extended periods, even several years. On the other hand, with low inflow and low reservoir contents these prices may then increase sharply even for a few months reflecting dry hydro conditions. This volatility is superimposed on the daily and seasonal load fluctuations and gradually increasing demand which should ideally provide the price incentive for capacity expansion. In other words, the hydrological "noise" disturbs the correct and meaningful price signals. Several methods have been proposed and are in use in liberalized hydro-based electricity markets to ensure supply adequacy. Explicit capacity remuneration methods or capacity requirements (obligations) imposed by a regulating authority represent additional mechanisms in liberalized hydro-based electricity markets to ensure supply adequacy. In some countries, these methods are coupled with the use of auctions, thus forming the backbone to induce the supply adequacy and long-run efficiency for end-users. In addition, small-scale power systems must rely also on special arrangements to avoid a strong interference on the market of new capacity additions. In many cases, it is still difficult to rely on purely market mechanism to assure the supply adequacy. The objective of this work is to discuss the issue of supply adequacy in systems with a high share of hydro or renewable power resources. Examples and case studies will be addressed in particular from the cases of Brazil and Iceland which represent both a large and a small renewable and hydro-based power system. The paper addresses and discusses the challenges and possible methodologies in ensuring supply adequacy in hydro- based systems with some lessons learned from past experiences and describing the solutions that are being implemented or considered for implementation.