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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