Strategic Reserve? Capacity Market? Laurens de Vries
Learning Objective • To understand how strategic reserves and capacity markets incentive investment.
Shortage Demand Price Volume
Strategic Reserve Demand Price Strategic Reserve Generation cost recovery Volume
Strategic Reserve Demand Price Strategic Reserve Generation cost recovery Volume
Issues • When should the reserve be dispatched? • At what price should it be offered? • How to keep the merit order from being disturbed? • Less effective in a market with a high share of solar and wind energy.
Strategic Reserve Advantages Disadvantages • Easy to implement • Possibility of price manipulation • Risk of ineffective dispatch • TSO in market – issues with unbundling • Less effective with high renewable share
Capacity Market • Separate market from wholesale market • All consumers must purchase capacity credits • Covers large part of fixed costs so prices spikes not necessary
Capacity Market Supply Curve Price Only new generators bid high prices Mostly zero bids Generation Capacity
Capacity Market Demand Curve The required capacity is the peak consumption plus a fixed percentage margin Price Minimum Required Capacity Reserve margin Generation Capacity
Capacity Market Price Capacity price Generation Capacity
Capacity Market Advantages Disadvantages • Robust and effective • Complex • Stabilises prices and • Less incentive for price encourages investment elasticity of demand • Cross-border trade complicated
Summarising • A strategic reserve and a capacity market are the two main capacity remuneration mechanisms currently under consideration. • A capacity market is more effective, but: – It is complicated; – It may discourage some demand flexibility; – It complicates cross-border trade.
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