A Menu Approach to Revealing Generator Reliability using a Stochastic Bilevel Mathematical Program

Mel Devine and Muireann Lynch

No WP518, Papers from Economic and Social Research Institute (ESRI)

Abstract: Liberalised electricity markets often include a capacity remuneration mechanism to allow generation firms recover their fixed costs. Various de-rating factors and/or penalties have been incorporated into such mechanisms in order to award the unit based on the contribution they make to system security, which in turn depends on the unit s reliability. However, this reliability is known to the firm but not to the regulator. We propose an adaptation of menu regulation to design capacity payments based on a declaration by the firm of their reliability. We scale payments and penalties according to this declared reliability such that the firm s profit-maximising strategy is to truthfully reveal their reliability. We apply the methodology to an illustrative test system. Truth-telling is induced, increasing the efficiency of capacity payments while eliminating the requirement for the regulator to allocate resources to discovering reliability.

Date: 2015-11
New Economics Papers: this item is included in nep-ene
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