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The effectiveness of capacity markets in the presence of a high portfolio share of renewable energy sources

Pradyumna C. Bhagwat, Kaveri K. Iychettira, Jörn C. Richstein, Emile J.L. Chappin and Laurens J. De Vries

Utilities Policy, 2017, vol. 48, issue C, 76-91

Abstract: The effectiveness of a capacity market is analyzed by simulating three conditions that may cause suboptimal investment in the electricity generation: imperfect information and uncertainty; declining demand shocks resulting in load loss; and a growing share of renewable energy sources in the generation portfolio. Implementation of a capacity market can improve supply adequacy and reduce consumer costs. It mainly leads to more investment in low-cost peak generation units. If the administratively determined reserve margin is high enough, the security of supply is not significantly affected by uncertainties or demand shocks. A capacity market is found to be more effective than a strategic reserve for ensuring reliability.

Keywords: Adequacy policy; Capacity markets; Security of supply (search for similar items in EconPapers)
Date: 2017
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Handle: RePEc:eee:juipol:v:48:y:2017:i:c:p:76-91