A Capacity Market to Improve the Transition towards Sustainable Electricity Generation

Sebastian Schäfer () and Lisa Schulten ()
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Sebastian Schäfer: University of Siegen
Lisa Schulten: University of Marburg

MAGKS Papers on Economics from Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung)

Abstract: A capacity mechanism next to the energy-only market provides necessary investment incentives that spot markets lack. We suggest a capacity market which also accounts for the current transition to a higher share of renewable energy. This creates a powerful regulation to improve the transition process. We show that an increasing share of renewables leads to a comparative advantage for peak-load power plants in a capacity market. This results in higher flexibility as opposed to missing flexibility induced by the merit order effect at the spot market. Capacity mechanisms do not account for the effects caused by promoting renewable energy so far. We consider these effects via endogenous discrimination of prices paid for offered capacity. This triggers more efficient incentives to direct the capacity mix to its long-run equilibrium where discriminated prices converge to one equilibrium capacity price.

Keywords: Capacity Markets; Electricity Markets; Resource Adequacy; 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)
Pages: 29 pages
Date: 2014
New Economics Papers: this item is included in nep-ene and nep-reg
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Persistent link: https://EconPapers.repec.org/RePEc:mar:magkse:201439

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