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

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  • 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
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    References listed on IDEAS

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    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. Devine, Mel T. & Lynch, Muireann Á., 2017. "Inducing truthful revelation of generator reliability," Energy Economics, Elsevier, vol. 64(C), pages 186-195.
    6. 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.
    7. 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.
    8. 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.
    9. 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.
    10. 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).
    11. 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.
    12. 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.
    13. 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).
    14. 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).
    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).
    16. Chattopadhyay,Debabrata & Suski,Adam Krzysztof, 2022. "Should Electricity Market Designs Be Improved to Drive Decarbonization ?," Policy Research Working Paper Series 10207, The World Bank.

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