On the functioning of a capacity market with an increasing share of renewable energy

Sebastian Schäfer () and Lisa Altvater ()
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Sebastian Schäfer: Universität Siegen
Lisa Altvater: Universität Siegen

Journal of Regulatory Economics, 2019, vol. 56, issue 1, No 3, 59-84

Abstract: Abstract Capacity auctions with reliability options are seen as a promising possibility to reduce the investment risk for electricity generators as well as to set incentives for sufficient investments in generating capacity. However, there has been little attention so far on the interaction between a capacity market and an increasing share of renewable energy. In a first step we formalize the functioning of capacity auctions with reliability options. We improve their incentive regulation to allow effective incentives for sufficient investments. In a second step we study, with comparative statics, how an increasing share of renewable energy, varying carbon emission costs and the existing capacity mix influence the outcome of a capacity auction. For an increasing share of renewable energy, capacity auctions direct investments to more flexible power plants. This opposes the merit order effect of renewable energy which is observed at energy-only markets. A capacity market can therefore prevent missing flexibility feared at energy-only markets as a result of an increasing share of renewable energy.

Keywords: Capacity markets; Electricity markets; Reliability options; Renewable energy; Merit order effect (search for similar items in EconPapers)
JEL-codes: L94 Q41 Q42 Q48 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (1)

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DOI: 10.1007/s11149-019-09389-6

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