IDEAS home Printed from https://ideas.repec.org/a/aen/journl/ej38-2-lynch.html
   My bibliography  Save this article

Investment vs. Refurbishment: Examining Capacity Payment Mechanisms Using Stochastic Mixed Complementarity Problems

Author

Listed:
  • Muireann A. Lynch and Mel T. Devine

Abstract

Capacity remuneration mechanisms exist in many electricity markets. Capacity mechanism designs do not explicitly consider the effects of refurbishment of existing generation units in order to increase their reliability. This paper presents a stochastic mixed complementarity problem to examine the impact of refurbishment on electricity prices and generation investment. Capacity payments are found to increase reliability when refurbishment is not possible, while capacity payments and reliability options yield similar results when refurbishment is possible. Final costs to consumers are similar under the two mechanisms with the exception of the initial case of overcapacity.

Suggested Citation

  • Muireann A. Lynch and Mel T. Devine, 2017. "Investment vs. Refurbishment: Examining Capacity Payment Mechanisms Using Stochastic Mixed Complementarity Problems," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2).
    • Handle: RePEc:aen:journl:ej38-2-lynch
    as

    Download full text from publisher

    File URL: http://www.iaee.org/en/publications/ejarticle.aspx?id=2876
    Download Restriction: Access to full text is restricted to IAEE members and subscribers.
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Lion Hirth, 2013. "The Market Value of Variable Renewables. The Effect of Solar and Wind Power Variability on their Relative Price," RSCAS Working Papers 2013/36, European University Institute.
    2. Peter Cramton & Axel Ockenfels, 2012. "Economics and Design of Capacity Markets for the Power Sector," Papers of Peter Cramton 12cocap, University of Maryland, Department of Economics - Peter Cramton, revised 2012.
    3. Jean-Jacques Laffont & Jean Tirole, 1993. "A Theory of Incentives in Procurement and Regulation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121743, December.
    4. Cramton, Peter & Stoft, Steven, 2008. "Forward reliability markets: Less risk, less market power, more efficiency," Utilities Policy, Elsevier, vol. 16(3), pages 194-201, September.
    5. De Vries, Laurens J., 2007. "Generation adequacy: Helping the market do its job," Utilities Policy, Elsevier, vol. 15(1), pages 20-35, March.
    6. Roland Meyer & Olga Gore, 2014. "Cross-Border Effects of Capacity Mechanisms: Do Uncoordinated Market Design Changes Contradict the Goals of the European Market Integration?," Bremen Energy Working Papers 0017, Bremen Energy Research.
    7. Di Cosmo, Valeria & Hyland, Marie, 2013. "Carbon tax scenarios and their effects on the Irish energy sector," Energy Policy, Elsevier, vol. 59(C), pages 404-414.
    8. Bhagwat, Pradyumna C. & de Vries, Laurens J. & Hobbs, Benjamin F., 2016. "Expert survey on capacity markets in the US: Lessons for the EU," Utilities Policy, Elsevier, vol. 38(C), pages 11-17.
    9. Cramton, Peter & Stoft, Steven, 2005. "A Capacity Market that Makes Sense," The Electricity Journal, Elsevier, vol. 18(7), pages 43-54.
    10. Hirth, Lion, 2013. "The market value of variable renewables," Energy Economics, Elsevier, vol. 38(C), pages 218-236.
    11. Troy, Niamh & Denny, Eleanor & O'Malley, Mark, 2010. "Base-load cycling on a system with significant wind penetration," MPRA Paper 34848, University Library of Munich, Germany.
    12. Abbott, Malcolm, 2001. "Is the Security of Electricity Supply a Public Good?," The Electricity Journal, Elsevier, vol. 14(7), pages 31-33.
    13. Haikel Khalfallah, 2011. "A Game theoretic model for generation capacity adequacy: Comparison between investment incentive mechanisms in electricity markets," Post-Print halshs-00743195, HAL.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Devine, Mel T. & Siddiqui, Sauleh, 2023. "Strategic investment decisions in an oligopoly with a competitive fringe: An equilibrium problem with equilibrium constraints approach," European Journal of Operational Research, Elsevier, vol. 306(3), pages 1473-1494.
    2. Bertsch, Valentin & Devine, Mel, 2019. "The Role of Demand Response in Mitigating Market Power — A Quantitative Analysis Using a Stochastic Market Equilibrium Model," Papers WP635, Economic and Social Research Institute (ESRI).
    3. Bublitz, Andreas & Keles, Dogan & Zimmermann, Florian & Fraunholz, Christoph & Fichtner, Wolf, 2018. "A survey on electricity market design: Insights from theory and real-world implementations of capacity remuneration mechanisms," Working Paper Series in Production and Energy 27, Karlsruhe Institute of Technology (KIT), Institute for Industrial Production (IIP).
    4. Nolan, Sheila & Devine, Mel & Lynch, Muireann & O'Malley, Mark, 2016. "Impact of Demand Response Participation in Energy, Reserve and Capacity Markets," MPRA Paper 74672, University Library of Munich, Germany.
    5. Nolan, Sheila & Devine, Mel & Lynch, Muireann A. & O’Malley, Mark, 2017. "The effect of Demand Response and wind generation on electricity investment and operation," Papers WP577, Economic and Social Research Institute (ESRI).
    6. Devine, Mel T. & Lynch, Muireann Á., 2017. "Inducing truthful revelation of generator reliability," Energy Economics, Elsevier, vol. 64(C), pages 186-195.
    7. Di Cosmo, Valeria & Lynch, Muireann Á., 2016. "Competition and the single electricity market: Which lessons for Ireland?," Utilities Policy, Elsevier, vol. 41(C), pages 40-47.
    8. Devine, Mel T. & Bertsch, Valentin, 2018. "Examining the benefits of load shedding strategies using a rolling-horizon stochastic mixed complementarity equilibrium model," European Journal of Operational Research, Elsevier, vol. 267(2), pages 643-658.
    9. Bublitz, Andreas & Keles, Dogan & Zimmermann, Florian & Fraunholz, Christoph & Fichtner, Wolf, 2019. "A survey on electricity market design: Insights from theory and real-world implementations of capacity remuneration mechanisms," Energy Economics, Elsevier, vol. 80(C), pages 1059-1078.
    10. Lynch, Muireann Á. & Nolan, Sheila & Devine, Mel T. & O’Malley, Mark, 2019. "The impacts of demand response participation in capacity markets," Applied Energy, Elsevier, vol. 250(C), pages 444-451.
    11. Bertsch, Valentin & Devine, Mel & Sweeney, Conor & Parnell, Andrew C., 2018. "Analysing long-term interactions between demand response and different electricity markets using a stochastic market equilibrium model," Papers WP585, Economic and Social Research Institute (ESRI).
    12. Mel T. Devine & Valentin Bertsch, 2023. "The role of demand response in mitigating market power: a quantitative analysis using a stochastic market equilibrium model," OR Spectrum: Quantitative Approaches in Management, Springer;Gesellschaft für Operations Research e.V., vol. 45(2), pages 555-597, June.
    13. Chris Johnathon & Ashish Prakash Agalgaonkar & Joel Kennedy & Chayne Planiden, 2021. "Analyzing Electricity Markets with Increasing Penetration of Large-Scale Renewable Power Generation," Energies, MDPI, vol. 14(22), pages 1-15, November.
    14. Brito-Pereira, Paulo & Rodilla, Pablo & Mastropietro, Paolo & Batlle, Carlos, 2022. "Self-fulfilling or self-destroying prophecy? The relevance of de-rating factors in modern capacity mechanisms," Applied Energy, Elsevier, vol. 314(C).
    15. S. Oliveira, Fernando & William-Rioux, Bertrand & Pierru, Axel, 2023. "Capacity expansion in liberalized electricity markets with locational pricing and renewable energy investments," Energy Economics, Elsevier, vol. 127(PB).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Lynch, Muireann Á. & Devine, Mel, 2015. "Investment vs. Refurbishment: Examining Capacity Payment Mechanisms Using Mixed Complementarity Problems With Endogenous Probability," Papers WP507, Economic and Social Research Institute (ESRI).
    2. Devine, Mel & Lynch, Muireann Á., 2015. "A Menu Approach to Revealing Generator Reliability using a Stochastic Bilevel Mathematical Program," Papers WP518, Economic and Social Research Institute (ESRI).
    3. Devine, Mel T. & Lynch, Muireann Á., 2017. "Inducing truthful revelation of generator reliability," Energy Economics, Elsevier, vol. 64(C), pages 186-195.
    4. Keppler, Jan Horst & Quemin, Simon & Saguan, Marcelo, 2022. "Why the sustainable provision of low-carbon electricity needs hybrid markets," Energy Policy, Elsevier, vol. 171(C).
    5. Bhagwat, Pradyumna C. & Richstein, Jörn C. & Chappin, Emile J.L. & Iychettira, Kaveri K. & De Vries, Laurens J., 2017. "Cross-border effects of capacity mechanisms in interconnected power systems," Utilities Policy, Elsevier, vol. 46(C), pages 33-47.
    6. Elberg, Christina, 2014. "Cross-Border Effects of Capacity Mechanisms in Electricity Markets," EWI Working Papers 2014-11, Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI).
    7. Meyer, Roland & Gore, Olga, 2015. "Cross-border effects of capacity mechanisms: Do uncoordinated market design changes contradict the goals of the European market integration?," Energy Economics, Elsevier, vol. 51(C), pages 9-20.
    8. Simshauser, Paul, 2022. "Rooftop solar PV and the peak load problem in the NEM's Queensland region," Energy Economics, Elsevier, vol. 109(C).
    9. Di Cosmo, Valeria & Lynch, Muireann Á., 2016. "Competition and the single electricity market: Which lessons for Ireland?," Utilities Policy, Elsevier, vol. 41(C), pages 40-47.
    10. Simshauser, Paul, 2020. "Merchant renewables and the valuation of peaking plant in energy-only markets," Energy Economics, Elsevier, vol. 91(C).
    11. Bhagwat, Pradyumna C. & Richstein, Jörn C. & Chappin, Emile J.L. & Iychettira, Kaveri K. & Vries, Laurens J. De, 2017. "Cross-border effects of capacity mechanisms in interconnected power systems," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 46, pages 33-47.
    12. Bublitz, Andreas & Keles, Dogan & Zimmermann, Florian & Fraunholz, Christoph & Fichtner, Wolf, 2019. "A survey on electricity market design: Insights from theory and real-world implementations of capacity remuneration mechanisms," Energy Economics, Elsevier, vol. 80(C), pages 1059-1078.
    13. Khan, Agha Salman M. & Verzijlbergh, Remco A. & Sakinci, Ozgur Can & De Vries, Laurens J., 2018. "How do demand response and electrical energy storage affect (the need for) a capacity market?," Applied Energy, Elsevier, vol. 214(C), pages 39-62.
    14. Komorowska, Aleksandra & Benalcazar, Pablo & Kaszyński, Przemysław & Kamiński, Jacek, 2020. "Economic consequences of a capacity market implementation: The case of Poland," Energy Policy, Elsevier, vol. 144(C).
    15. Bublitz, Andreas & Keles, Dogan & Zimmermann, Florian & Fraunholz, Christoph & Fichtner, Wolf, 2018. "A survey on electricity market design: Insights from theory and real-world implementations of capacity remuneration mechanisms," Working Paper Series in Production and Energy 27, Karlsruhe Institute of Technology (KIT), Institute for Industrial Production (IIP).
    16. Curtis, John & Lynch, Muireann Á. & Zubiate, Laura, 2016. "The impact of the North Atlantic Oscillation on electricity markets: A case study on Ireland," Energy Economics, Elsevier, vol. 58(C), pages 186-198.
    17. Javier L'opez Prol & Wolf-Peter Schill, 2020. "The Economics of Variable Renewables and Electricity Storage," Papers 2012.15371, arXiv.org.
    18. Winkler, Jenny & Gaio, Alberto & Pfluger, Benjamin & Ragwitz, Mario, 2016. "Impact of renewables on electricity markets – Do support schemes matter?," Energy Policy, Elsevier, vol. 93(C), pages 157-167.
    19. Gugler, Klaus & Haxhimusa, Adhurim, 2019. "Market integration and technology mix: Evidence from the German and French electricity markets," Energy Policy, Elsevier, vol. 126(C), pages 30-46.
    20. Fabra, Natalia & Montero, Juan Pablo, 2020. "Technology-Neutral vs. Technology-Specific Procurement," CEPR Discussion Papers 15554, C.E.P.R. Discussion Papers.

    More about this item

    JEL classification:

    • F0 - International Economics - - General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:aen:journl:ej38-2-lynch. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: David Williams (email available below). General contact details of provider: https://edirc.repec.org/data/iaeeeea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.