Capacity Market Design Options: A Capacity Expansion Model and a GB Case Study

36 Pages Posted: 11 May 2014

See all articles by Daniel Hach

Daniel Hach

WHU - Otto Beisheim School of Management

Chi Kong Chyong

University of Cambridge - Judge Business School

Stefan Spinler

WHU-Otto Beisheim School of Management

Date Written: May 9, 2014

Abstract

Rising feed-in from renewable energy sources decreases margins, load factors, and thereby profitability of conventional generation in several electricity markets around the world. At the same time, conventional generation is still needed to ensure security of electricity supply. Therefore, capacity markets are currently being widely discussed as a measure to ensure generation adequacy in markets such as France, Germany, and the United States (e.g., Texas), or even implemented for example in Great Britain.

We develop a capacity expansion model to assess the effect of different capacity market design options in three scenarios: 1) no capacity market, 2) a capacity market for new capacity only, and 3) a capacity market for new and existing capacity. We compare the results along the three key dimensions of electricity policy - affordability, reliability, and sustainability. In a Great Britain case study we find that a capacity market increases generation adequacy. Furthermore, our results show that a capacity market can lower the total bill of generation because it can reduce lost load and the potential to exercise market power. Additionally, we find that a capacity market for new capacity only is cheaper than a capacity market for new and existing capacity because it remunerates fewer generators in the first years after its introduction. However, we emphasize that there is a significant downside of such an unequal treatment that should be considered when deciding on this design option.

Keywords: Capacity mechanism, capacity market, conventional electricity generation investment, capacity expansion model, generation adequacy, generation adequacy

JEL Classification: Q48, L94, L98, C44, D81

Suggested Citation

Hach, Daniel and Chyong, Chi Kong and Spinler, Stefan, Capacity Market Design Options: A Capacity Expansion Model and a GB Case Study (May 9, 2014). Available at SSRN: https://ssrn.com/abstract=2435165 or http://dx.doi.org/10.2139/ssrn.2435165

Daniel Hach (Contact Author)

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
Vallendar, 56179
Germany

Chi Kong Chyong

University of Cambridge - Judge Business School ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom

Stefan Spinler

WHU-Otto Beisheim School of Management ( email )

Burgplatz 2
Vallendar, 56179
Germany
+49-261-6509430 (Phone)

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