An experimental study of capacity remuneration mechanisms in the electricity industry

Céline Julien, Haikel Khalfallah (), Virginie Pignon, Stéphane Robin () and Carine Staropoli ()
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Céline Julien: Cleantech Group
Haikel Khalfallah: GAEL - Laboratoire d'Economie Appliquée de Grenoble - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement - UGA - Université Grenoble Alpes - Grenoble INP - Institut polytechnique de Grenoble - Grenoble Institute of Technology - UGA - Université Grenoble Alpes
Virginie Pignon: Enedis
Stéphane Robin: GAEL - Laboratoire d'Economie Appliquée de Grenoble - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement - UGA - Université Grenoble Alpes - Grenoble INP - Institut polytechnique de Grenoble - Grenoble Institute of Technology - UGA - Université Grenoble Alpes
Carine Staropoli: PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement

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Abstract: After electricity liberalization, the "energy-only market" design lacks effective incentives to invest in new capacity. Across the world, capacity remuneration mechanisms have been taking hold as an alternative to the energy-only market to ensure adequate power generation capacity. The way these designs are characterized reflects the insight from general economic theory on market power and strategic behavior. Indeed, Europe is heading toward a patchwork of different, uncoordinated national mechanisms. In practice, design choices are driven by national policies, needs and constraints. In addition, they are progressively converging toward a market-based mechanism with a forward period and market power mitigation. In this paper, we investigate their efficiency properties in terms of new investments, the reduction in unserved energy frequency and the energy prices of a generic capacity remuneration mechanism that is impervious to the so-called forward capacity market. The results from laboratory experiments confirm that this mechanism gives better incentives to invest in new capacity than the energy-only market alone and provides an empirical understanding of the investment decision process. The forward capacity market contributes to lower energy market prices in peak demand and extra-high peak demand periods and average energy costs if we consider the social cost of unserved energy.

Date: 2023-04
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Published in The journal of energy markets, 2023, 15 (4), ⟨10.21314/JEM.2023.018⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-04138033

DOI: 10.21314/JEM.2023.018

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