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Capacity certificate mechanism: A step forward toward a market based generation capacity incentive

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  • Heidarizadeh, Mohammad
  • Ahmadian, Mohammad

Abstract

Theoretical studies and practical experiences in power systems show that electricity market by itself cannot create an effective mechanism for optimal investment in generation capacity expansion. This is due to some inherent characteristics of power systems, such as high investment costs, and various risks in profit and return of capital. On the other hand, the political, social, and economic consequences of shortage of power generation are intolerable in any conditions. As a result, several incentives such as capacity payment, capacity auction, capacity obligation, and strategic reserve have been introduced to support investment in generation capacity. But all these incentives suffer from a number of inadequacies and inefficiencies. In this paper, first a new incentive called Capacity Certificate is proposed and its characteristics are explained. Then, taking the advantage of System Dynamics, the impact of this mechanism on long-term performance of power market is studied from the generation capacity expansion perspective, and is compared with energy-only and capacity payment mechanisms. Indicators such as system reserve and the overall customer payments reveal the benefits of the proposed mechanism. In addition, this mechanism effectively motivates the customers to optimize their energy consumption, while none of the other incentives has such a capability.

Suggested Citation

  • Heidarizadeh, Mohammad & Ahmadian, Mohammad, 2019. "Capacity certificate mechanism: A step forward toward a market based generation capacity incentive," Energy, Elsevier, vol. 172(C), pages 45-56.
  • Handle: RePEc:eee:energy:v:172:y:2019:i:c:p:45-56
    DOI: 10.1016/j.energy.2019.01.091
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