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Crediting Wind and Solar Renewables in Electricity Capacity Markets: The Effects of Alternative Definitions upon Market Efficiency

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  • Cynthia Bothwell and Benjamin F. Hobbs

Abstract

As the penetration of variable renewable energy in electricity markets grows, there is increasing need for capacity markets to account for the contribution of renew-ables to system adequacy. An important issue is the inconsistent industry definition of capacity credits for resources whose availability may be limited, such as renewable generation. Inaccurate credits can subsidize or penalize different resources, and consequently distort investment between renewables and non-renew-ables, and also among different types and locations of renewables. Using Electric Reliability Council of Texas (ERCOT) data, we use a market equilibrium model to quantify the resulting loss of efficiency due to capacity credits alone and in combination with renewable tax subsidies and portfolio standards. Layering inaccurate capacity credits with existing US federal tax subsidies decreases efficiency as much as 6.3% compared to optimal capacity crediting under those subsidies. Compensating producers based on their marginal contributions to system adequacy, considering how renewable penetration affects the timing of net load peaks, can yield an efficient capacity market design.

Suggested Citation

  • Cynthia Bothwell and Benjamin F. Hobbs, 2017. "Crediting Wind and Solar Renewables in Electricity Capacity Markets: The Effects of Alternative Definitions upon Market Efficiency," The Energy Journal, International Association for Energy Economics, vol. 0(KAPSARC S).
    • Handle: RePEc:aen:journl:ej38-si1-bothwell
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    References listed on IDEAS

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    1. 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.
    2. Neuhoff, Karsten & De Vries, Laurens, 2004. "Insufficient incentives for investment in electricity generations," Utilities Policy, Elsevier, vol. 12(4), pages 253-267, December.
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    Cited by:

    1. Han Shu & Jacob Mays, 2022. "Beyond capacity: contractual form in electricity reliability obligations," Papers 2210.10858, arXiv.org.
    2. Astier, Nicolas & Ovaere, Marten, 2022. "Reliability standards and generation adequacy assessments for interconnected electricity systems," Energy Policy, Elsevier, vol. 168(C).
    3. Brown, Patrick R. & O'Sullivan, Francis M., 2020. "Spatial and temporal variation in the value of solar power across United States electricity markets," Renewable and Sustainable Energy Reviews, Elsevier, vol. 121(C).
    4. Sebastian Schäfer & Lisa Altvater, 2019. "On the functioning of a capacity market with an increasing share of renewable energy," Journal of Regulatory Economics, Springer, vol. 56(1), pages 59-84, August.
    5. Bhagwat, Pradyumna C. & Iychettira, Kaveri K. & Richstein, Jörn C. & Chappin, Emile J.L. & De Vries, Laurens J., 2017. "The effectiveness of capacity markets in the presence of a high portfolio share of renewable energy sources," Utilities Policy, Elsevier, vol. 48(C), pages 76-91.
    6. Bhagwat, Pradyumna C. & Iychettira, Kaveri K. & Richstein, Jörn C. & Chappin, Emile J.L. & Vries, Laurens J. De, 2017. "The effectiveness of capacity markets in the presence of a high portfolio share of renewable energy sources," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 48, pages 76-91.
    7. David Brown, 2018. "Capacity Market Design: Motivation and Challenges in Alberta’s Electricity Market," SPP Briefing Papers, The School of Public Policy, University of Calgary, vol. 11(12), March.
    8. 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.
    9. Mastropietro, Paolo & Rodilla, Pablo & Batlle, Carlos, 2019. "De-rating of wind and solar resources in capacity mechanisms: A review of international experiences," Renewable and Sustainable Energy Reviews, Elsevier, vol. 112(C), pages 253-262.
    10. Brown, David P., 2018. "Capacity payment mechanisms and investment incentives in restructured electricity markets," Energy Economics, Elsevier, vol. 74(C), pages 131-142.
    11. Peter, Jakob & Wagner, Johannes, 2018. "Optimal Allocation of Variable Renewable Energy Considering Contributions to Security of Supply," EWI Working Papers 2018-2, Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI).
    12. Joseph Nyangon & John Byrne, 2023. "Estimating the impacts of natural gas power generation growth on solar electricity development: PJM's evolving resource mix and ramping capability," Wiley Interdisciplinary Reviews: Energy and Environment, Wiley Blackwell, vol. 12(1), January.
    13. S. Wogrin & D. Tejada-Arango & S. Delikaraoglou & A. Lamadrid & A. Botterud, 2022. "The impact of convexity on expansion planning in low-carbon electricity markets," TOP: An Official Journal of the Spanish Society of Statistics and Operations Research, Springer;Sociedad de Estadística e Investigación Operativa, vol. 30(3), pages 574-593, October.
    14. Brito-Pereira, Paulo & Mastropietro, Paolo & Rodilla, Pablo & Barroso, Luiz Augusto & Batlle, Carlos, 2022. "Adjusting the aim of capacity mechanisms: Future-proof reliability metrics and firm supply calculations," Energy Policy, Elsevier, vol. 164(C).
    15. 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).
    16. Lynch, Muireann Á. & Longoria, Genora & Curtis, John, 2021. "Future market design options for electricity markets with high RES-E: lessons from the Irish Single Electricity Market," Papers WP702, Economic and Social Research Institute (ESRI).
    17. Muñoz, Francisco D. & Suazo-Martínez, Carlos & Pereira, Eduardo & Moreno, Rodrigo, 2021. "Electricity market design for low-carbon and flexible systems: Room for improvement in Chile," Energy Policy, Elsevier, vol. 148(PB).

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