capacity mechanisms in Europe: a quantitative impact assessment

Abstract

Actors in electricity markets are having trouble keeping up with a rapidly changing environment. Several factors are prohibiting markets from functioning optimally, which leads to distorted investment signals and might endanger the security of supply in electricity markets in the near future. Capacity remuneration mechanisms (CRMs) have been proposed to function in tandem with electricity markets to safeguard the security of supply. This research makes an assessment of the security of supply in electricity markets in Central Western Europe, and assesses the impact of different types of capacity remuneration mechanisms on these markets. A bottom-up power system model was constructed in order to simulate investment and dispatch decisions in electricity markets. Results of these simulations show that the security of supply is not guaranteed in the current energy only market, and CRMs increase the security of supply. When a comparison is made between quantity and price based CRMs, quantity based CRMs are the superior alternative in both effectiveness and efficiency. A quantity based CRM can be combined with a system of physical options to further reduce the cost of implementing the CRM.