The impact of short-term pricing on flexible generation investments in electricity markets

Cristian Villalobos, Matías Negrete-Pincetic, Nicolás Figueroa, Álvaro Lorca and Daniel Olivares

Energy Economics, 2021, vol. 98, issue C

Abstract: The massive growth in the integration of variable renewable energy sources is producing several challenges in the operation of power systems and its associated markets. In this context, flexibility has become a critical attribute to allow the system to react to changes in generation or demand levels. Thus, it is critical for market signals at both short and long term scales to include flexibility features, to align agents' incentives with systemic flexibility requirements. In this paper, different pricing schemes for short-term markets are studied, based on various relaxations of the unit commitment problem, including convex-hull approximations, with the aim of representing operational flexibility requirements in a more explicit way. Extensive simulations illustrate the performance of the proposed schemes, as compared to conventional ones, in terms of the capability of the system to properly incentivize flexibility attributes, resulting in better agents' cost recovery and more variable renewable energy utilization. The results show that short-term pricing schemes considered improve the long-term signals for flexible investments but additional changes to market design are still required. Thus, there is a need to revisit historical practices for pricing rules by incorporating additional flexibility-related attributes into them. Several alternatives are discussed and policy recommendations based on these considerations are provided.

Keywords: Electricity markets; Pricing schemes; Market incentives; Flexibility; Renewable energy (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:98:y:2021:i:c:s0140988321001183

DOI: 10.1016/j.eneco.2021.105213

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