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Economics and Design of Capacity Markets for the Power Sector

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Abstract

Capacity markets are a means to assure resource adequacy. The need for a capacity market stems from several market failures the most prominent of which is the absence of a robust demand-side. Limited demand response makes market clearing problematic in times of scarcity. We present the economic motivation for a capacity market, present one specific market design that utilizes the best design features from various resource adequacy approaches analyzed in the literature, and we discuss other instruments to deal with the problems. We then discuss the suitability of the market for Europe and Germany in particular.

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File URL: http://www.cramton.umd.edu/papers2010-2014/cramton-ockenfels-economics-and-design-of-capacity-markets.pdf
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Bibliographic Info

Paper provided by University of Maryland, Department of Economics - Peter Cramton in its series Papers of Peter Cramton with number 12cocap.

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Length: 21 pages
Date of creation: 2012
Date of revision: 2012
Publication status: Published in Zeitschrift für Energiewirtschaft, 36:113-134, 2012
Handle: RePEc:pcc:pccumd:12cocap

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Postal: Economics Department, University of Maryland, College Park, MD 20742-7211
Phone: (202) 318-0520
Fax: (202) 318-0520
Web page: http://www.cramton.umd.edu

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Keywords: Auctions; electricity auctions; capacity auctions; reliability auctions;

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References

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  1. Michael A. Crew & Paul R. Kleindorfer, 1976. "Peak Load Pricing with a Diverse Technology," Bell Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 7(1), pages 207-231, Spring.
  2. Hart, Oliver, 1995. "Firms, Contracts, and Financial Structure," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780198288817, October.
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Cited by:
  1. Tveten, Åsa Grytli & Bolkesjø, Torjus Folsland & Martinsen, Thomas & Hvarnes, Håvard, 2013. "Solar feed-in tariffs and the merit order effect: A study of the German electricity market," Energy Policy, Elsevier, Elsevier, vol. 61(C), pages 761-770.
  2. Grossi, Luigi & Heim, Sven & Waterson, Michael, 2014. "A vision of the European energy future? The impact of the German response to the Fukushima earthquake," The Warwick Economics Research Paper Series (TWERPS), University of Warwick, Department of Economics 1047, University of Warwick, Department of Economics.
  3. Katrin Schmitz & Bjarne Steffen & Christoph Weber, 2013. "Incentive or impediment? The impact of capacity mechanisms on storage plants," RSCAS Working Papers, European University Institute 2013/46, European University Institute.
  4. Elberg, Christina, 2014. "Cross-Border Effects of Capacity Mechanisms in Electricity Markets," EWI Working Papers, Energiewirtschaftliches Institut an der Universitaet zu Koeln 2014-11, Energiewirtschaftliches Institut an der Universitaet zu Koeln.
  5. Edenhofer, Ottmar & Hirth, Lion & Knopf, Brigitte & Pahle, Michael & Schlömer, Steffen & Schmid, Eva & Ueckerdt, Falko, 2013. "On the economics of renewable energy sources," Energy Economics, Elsevier, Elsevier, vol. 40(S1), pages S12-S23.
  6. Sebastian Schäfer & Lisa Schulten, 2014. "A Capacity Market for Electricity Sectors with Promotion of Renewable Energy," MAGKS Papers on Economics, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung) 201439, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  7. Gawel, Erik & Purkus, Alexandra, 2012. "Die Marktprämie im EEG 2012: Ein sinnvoller Beitrag zur Markt- und Systemintegration erneuerbarer Energien?," UFZ Discussion Papers, Helmholtz Centre for Environmental Research (UFZ), Division of Social Sciences (ÖKUS) 12/2012, Helmholtz Centre for Environmental Research (UFZ), Division of Social Sciences (ÖKUS).
  8. Benjamin Häusinger & Julian Dieler & Jana Lippelt, 2012. "Kurz zum Klima: Kohlekraft im Schatten der Energiewende," Ifo Schnelldienst, Ifo Institute for Economic Research at the University of Munich, Ifo Institute for Economic Research at the University of Munich, vol. 65(22), pages 34-40, November.
  9. Grossi, Luigi & Heim, Sven & Waterson, Michael, 2014. "A vision of the European energy future? The impact of the German response to the Fukushima earthquake," ZEW Discussion Papers, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research 14-051, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  10. Gawel, Erik & Purkus, Alexandra, 2013. "Promoting the market and system integration of renewable energies through premium schemes—A case study of the German market premium," Energy Policy, Elsevier, Elsevier, vol. 61(C), pages 599-609.

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