Capacity Market and Investments in Power Generations: Risk-Averse Decision-Making of Power Producer

Naoki Makimoto and Ryuta Takashima ()
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Naoki Makimoto: Institute of Business Sciences, University of Tsukuba, Bunkyo-ku, Tokyo 112-0012, Japan
Ryuta Takashima: Department of Industrial and Systems Engineering, Tokyo University of Science, Chiba, Noda-shi 278-8510, Japan

Energies, 2023, vol. 16, issue 10, 1-19

Abstract: The penetration of power generations from renewable energy sources into the power market has a significant impact on the capacity factor of existing power generations. This is because power producers cannot recover a capital cost of power generations with high operating cost possibly due to underinvestment. One solution to address this problem includes a capacity mechanism; that is, the capacities of the power generations can be sold through a market or a bilateral contract. Many schemes of the capacity mechanism have been used worldwide. In this study, we examine an investment in a power plant in both the electricity and capacity markets. The effect of investment opportunity on uncertainty and risk aversion is analyzed by a real options approach that is one of analytical methods for investment decisions under uncertainty. The investment timing for the standard energy-only market is compared with that for the capacity market. When the risk averse for the power producer is relatively small, the income in the energy-only market is obtained whereas, when the risk averse is relatively high, the income is gained in both the electricity and capacity markets for the sake of enough profit.

Keywords: capacity market; electricity market; investment in power generation; risk-averse decision making; mean-variance utility; threshold price (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: 2023
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