A Capacity Market for the Transition towards Renewable-Based Electricity Generation with Enhanced Political Feasibility

Sebastian Schäfer and Lisa Altvater
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Sebastian Schäfer: Universit ät Siegen, Unteres Schloß 3, 57072 Siegen, Germany
Lisa Altvater: Universit ät Siegen, Unteres Schloß 3, 57072 Siegen, Germany

Energies, 2021, vol. 14, issue 18, 1-24

Abstract: There is a debate if electricity markets on the basis of energy-only markets ensure a sufficient generation capacity. Various capacity mechanisms are discussed to tackle this potential problem. Capacity auctions with reliability options are seen as one market-based solution. Assuming a perfect energy-only market, this mechanism leads to an equilibrium with an optimal capacity mix. This optimum is missed if there are distorted price signals at the electricity market. This is a serious problem since, despite substantial cost reductions, renewable-based electricity generation still depends on subsidies, which are not internalized at electricity markets. We develop a capacity market that internalizes subsidies for RES without direct intervention in the electricity market. The result is an endogenous discrimination of capacity prices, which enhances acceptance for a capacity market. Arising incentives direct the capacity mix to an equilibrium where discriminated prices converge to one uniform capacity price. The equilibrium is the optimal answer of fossil capacity to RES-based electricity generation.

Keywords: focused capacity market; transition to renewable energy; political feasibility; internalization of external costs (search for similar items in EconPapers)
JEL-codes: Q Q0 Q4 Q40 Q41 Q42 Q43 Q47 Q48 Q49 (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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