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Marginal price impact under firm energy obligations in capacity remuneration mechanisms: The case of reliability options

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  • Gallego, Camilo A.

Abstract

We investigate how deviations from firm energy commitments under Colombia's reliability option mechanism affect electricity prices in the energy market, contrary to the expected functioning of capacity remuneration schemes in wholesale electricity markets. Using a daily panel from December 2006 to January 2024, we construct technology-specific compliance indices that compare actual generation with firm energy obligation levels. Our econometric strategy combines fixed effects and two-stage least squares (2SLS), instrumenting compliance with the administratively set scarcity price and hydro inflows to address endogeneity during drought-induced scarcity (El Niño) periods. We find that a 0.1-point drop in thermal compliance increases spot prices by Colombian Pesos (COP) 345/kWh, approximately 33 % higher than the impact of an equivalent hydro shortfall. During the severe 2015–2016 El Niño, thermal deficits of 10 %–15 % led to average spot price surges, possibly increasing costs for market participants by nearly USD 2.7 billion. These results are robust and statistically significant across alternative specifications and indicate that current market-based penalty incentives fail to neutralize observed firm energy deficits. This paper shows that an effectively designed strike price in reliability options, along with more competitive capacity payments aligned with international benchmarks, can strengthen incentives to deliver firm energy, reduce capacity costs, and enhance system reliability. The findings underscore the importance of continuous performance monitoring, particularly as capacity markets face increased scrutiny amid rising demand from electrification and data centers. Integrating weather-diversified renewables and batteries into firm energy accreditation schemes may enhance resilience in hydro-dependent systems and help reduce the cost of firm energy deviations for market participants.

Suggested Citation

  • Gallego, Camilo A., 2025. "Marginal price impact under firm energy obligations in capacity remuneration mechanisms: The case of reliability options," Energy Economics, Elsevier, vol. 152(C).
    • Handle: RePEc:eee:eneeco:v:152:y:2025:i:c:s014098832500862x
    DOI: 10.1016/j.eneco.2025.109032
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