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On the role of electricity storage in capacity remuneration mechanisms

Christoph Fraunholz, Dogan Keles and Wolf Fichtner

No 37, Working Paper Series in Production and Energy from Karlsruhe Institute of Technology (KIT), Institute for Industrial Production (IIP)

Abstract: In electricity markets around the world, the substantial increase of intermittent renewable electricity generation has intensified concerns about generation adequacy, ultimately driving the implementation of capacity remuneration mechanisms. Although formally technology-neutral, substantial barriers often exist in these mechanisms for non-conventional capacity such as electricity storage. In this article, we provide a rigorous theoretical discussion on design parameters and show that the concrete design of a capacity remuneration mechanism always creates a bias towards one technology or the other. In particular, we can identify the bundling of capacity auctions with call options and the definition of the storage capacity credit as essential drivers affecting the future technology mix as well as generation adequacy. In order to illustrate and confirm our theoretical findings, we apply an agent-based electricity market model and run a number of simulations. Our results show that electricity storage has a capacity value and should therefore be allowed to participate in any capacity remuneration mechanism. Moreover, we find the implementation of a capacity remuneration mechanism with call options and a strike price to increase the competitiveness of storages against conventional power plants. However, determining the amount of firm capacity an electricity storage unit can provide remains a challenging task.

Date: 2019
New Economics Papers: this item is included in nep-cmp, nep-des, nep-ene and nep-reg
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