Robustness of Capacity and Energy-Only Markets - A Stochastic Dynamic Capacity Investment Model

35 Pages Posted: 13 Oct 2014

See all articles by Daniel Hach

Daniel Hach

WHU - Otto Beisheim School of Management

Stefan Spinler

WHU-Otto Beisheim School of Management

Date Written: October 11, 2014

Abstract

We present a multi-feature stochastic dynamic capacity investment model that includes realistic investor behavior. The long-term investment model includes features, such as strategic bidding of generators, price elasticity of demand, and ramping constraints. It incorporates an iterative procedure of finding a sensible electricity price forecast closely depicting real-world investor behavior in a single computable model.

Using this model, we assess the robustness and the total bill of generation of a capacity market compared to an energy-only market as capacity markets are increasingly considered worldwide due to rising feed-in from renewables. To estimate unplanned unavailabilities, we analyze a novel data set of the European Energy Exchange describing unplanned unavailability incidents. Applying the model to the Great Britain market, we find that capacity markets are more robust to unplanned unavailabilities of conventional generation in terms of the total bill of generation and price volatility. At the same time, capacity markets induce additional costs through capacity payments. Therefore, we jointly analyze the total bill of generation and the robustness with different levels of reserve margins. Our results show that there is a promising area of efficient trade-offs between the two targets affordability and reliability in the range of reserve margins between 0 and 15%.

Keywords: electricity market, capacity mechanism, stochastic electricity capacity expansion model, generation adequacy, unplanned unavailability, uncertainty

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

Suggested Citation

Hach, Daniel and Spinler, Stefan, Robustness of Capacity and Energy-Only Markets - A Stochastic Dynamic Capacity Investment Model (October 11, 2014). Available at SSRN: https://ssrn.com/abstract=2508696 or http://dx.doi.org/10.2139/ssrn.2508696

Daniel Hach (Contact Author)

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
Vallendar, 56179
Germany

Stefan Spinler

WHU-Otto Beisheim School of Management ( email )

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

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