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Strategic behaviour in a capacity market? The new Irish electricity market design

Juha Teirilä and Robert Ritz

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

Abstract: The transition to a low-carbon power system requires growing the share of generation from (intermittent) renewables while ensuring security of supply. Policymakers and economists increasingly see a capacity mechanism as a way to deal with this challenge. Yet this raises new concerns about the exercise of market power by large players via the capacity auction. We present a new modelling approach that captures such strategic behaviour together with a set of ex ante empirical estimates for the new Irish electricity market design (I-SEM) – in which a single firm controls 44% of generation capacity (excluding wind). We find significant costs of strategic behaviour, even with new entry: In our baseline scenarios, procurement costs in the capacity auction are around 150-400 million EUR (or 40-100%) above the competitive least-cost solution. From a policy perspective, we also examine how market power can be measured and mitigated through auction design.

Keywords: capacity market; strategic behaviour; competitive benchmark analysis; restructured electricity market; auction design (search for similar items in EconPapers)
JEL-codes: D44 H57 L13 L94 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-com, nep-ene and nep-reg
Date: 2018-10-30
Note: rar36
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http://www.econ.cam.ac.uk/research-files/repec/cam/pdf/cwpe1863.pdf

Related works:
Journal Article: Strategic Behaviour in a Capacity Market? The New Irish Electricity Market Design (2019) Downloads
Working Paper: Strategic behaviour in a capacity market? The new Irish electricity market design (2018) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:cam:camdae:1863

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