Strategic Reserve? Capacity Market? Laurens de Vries Learning - - PowerPoint PPT Presentation

Strategic Reserve? Capacity Market?

Laurens de Vries

Learning Objective

• To understand how strategic reserves and

capacity markets incentive investment.

Price Volume Demand

Shortage

Volume Demand

Strategic Reserve

Price Generation cost recovery Strategic Reserve

Volume Demand

Strategic Reserve

Price Generation cost recovery Strategic Reserve

• 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.

Issues

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

Strategic Reserve

• Separate market from wholesale market
• All consumers must purchase capacity

credits

• Covers large part of fixed costs so prices

spikes not necessary

Capacity Market

Mostly zero bids Only new generators bid high prices

Price

Generation Capacity

Capacity Market Supply Curve

Price

Generation Capacity

The required capacity is the peak consumption plus a fixed percentage margin

Minimum Required Capacity Reserve margin

Capacity Market Demand Curve

Capacity price

Price

Generation Capacity

Capacity Market

Advantages Disadvantages

• Robust and effective
• Stabilises prices and

encourages investment

• Complex
• Less incentive for price

elasticity of demand

• Cross-border trade

complicated

Capacity Market

• 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.

Summarising