Capacity payment mechanisms and investment incentives in restructured electricity markets
David Brown ()
Energy Economics, 2018, vol. 74, issue C, 131-142
We investigate the impacts of capacity payment mechanisms on generation capacity investment and subsequent energy and capacity market competition. We analyze the optimal design of capacity demand parameters. The presence of price-responsive capacity demand reduces firms' abilities to exercise market power, alleviates the volatile bimodal capacity market pricing structure, reduces market concentration, and increases expected consumer surplus. While capacity payments expand investment, the first-best aggregate level of capacity is not achieved at the optimal capacity payment parameters. We demonstrate that the addition of subsidized renewable generation capacity puts downward pressure on energy prices. When renewable output is not sufficiently positively correlated with energy demand, renewable capacity expansion reduces the expected available production capacity and increases the probability of capacity scarcity for a given level of capacity demand parameters. Consequently, the regulator must expand capacity payments to achieve the same level of resource adequacy.
Keywords: Electricity; Capacity markets; Reliability; Market power; Regulation; Renewables (search for similar items in EconPapers)
JEL-codes: D44 L13 L50 L94 Q40 (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
Full text for ScienceDirect subscribers only
Working Paper: Capacity Payment Mechanisms and Investment Incentives in Restructured Electricity Markets (2014)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:74:y:2018:i:c:p:131-142
Access Statistics for this article
Energy Economics is currently edited by R. S. J. Tol, Beng Ang, Lance Bachmeier, Perry Sadorsky, Ugur Soytas and J. P. Weyant
More articles in Energy Economics from Elsevier
Bibliographic data for series maintained by Dana Niculescu ().