Reverse impact of capacity markets for a renewable-dominated power system

Junyi Tao, Ran Li, Sijie Chen, Hui Qu and Yue Xiang

Applied Energy, 2024, vol. 375, issue C, No S030626192401537X

Abstract: Many deregulated electricity markets worldwide have adopted capacity remuneration mechanisms (CRMs) to ensure capacity adequacy. Although these mechanisms have served many countries well in the last two decades, they may drive the generation mix away from the optimal in high variable renewable energy (VRE) penetration power systems. This paper investigates the impact of CRMs under different VRE penetrations by a long-term equilibrium model. We find that state-of-the-art CRMs like reliability options (ROs), can only reduce the financial risks for renewables when the VRE penetration stays low. It will reversely amplify renewables' risks and hinder their growth as their penetration increases. The underlying reason is that in a renewable-dominated power system, scarcity hours are triggered not only by demand peaks but also by VRE troughs, in which case renewables have to pay the penalty of non-delivery. Using the UK data, results show that compared with the optimized benchmark, existing CRMs like scarcity pricing (SP) and ROs are unable to lead to the optimal low-carbon generation mix, but for different reasons. The SP mechanism invests sufficient VRE but lacks incentives for controllable devices like hydropower plant and energy storage. Meanwhile, the ROs mechanism hinders the investment in VRE but encourages the investment of nuclear plant and storage to reduce the scarcity hours.

Keywords: Renewable-dominated power system; Capacity remuneration mechanism; Risk preference; Social welfare (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1016/j.apenergy.2024.124154

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