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The Energy Transition and the Value of Capacity Remuneration Mechanisms

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  • Bonaldo, Cinzia
  • Fontini, Fulvio
  • Moretto, Michele

Abstract

Capacity Remuneration Mechanisms (CRM) can be used in power markets to overtake market failures, reaching security of supply. However, investment in capacity is a dynamic process, that depends on the evolution of prices and costs overtime. In our paper we study the capacity remuneration value through a CRM depending on three possible different technologies that participate to the market: a Variable Renewable Energy (VRE) source; a thermal efficient plant (i.e. Combine Cycle Gas Turbine) and a brown plant (i.e. coal). We shall see that these three types of capacities can be framed by means of a common theoretical framework, those level of complexity increases as the uncertainty rises, moving from the simplest scheme (VRE technology) to the most complex one (coal power plant). For these different technological provisions, we consider how to evaluate them focusing on their investment value by adopting a stochastic approach; we first provide a theoretical framework and then sensitivity analysis and calibration results. We show that for all three technology considered the effect of the CRM is to cap the firm revenues and as consequence it decreases their value.

Suggested Citation

  • Bonaldo, Cinzia & Fontini, Fulvio & Moretto, Michele, 2022. "The Energy Transition and the Value of Capacity Remuneration Mechanisms," FEEM Working Papers 321985, Fondazione Eni Enrico Mattei (FEEM).
  • Handle: RePEc:ags:feemwp:321985
    DOI: 10.22004/ag.econ.321985
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    1. Huang, Zhenyu & Liu, Youbo & Li, Kecun & Liu, Jichun & Gao, Hongjun & Qiu, Gao & Shen, Xiaodong & Liu, Junyong, 2023. "Evaluating long-term profile of demand response under different market designs: A comparison of scarcity pricing and capacity auction," Energy, Elsevier, vol. 282(C).
    2. Marta Castellini & Chiara D'Alpaos & Fulvio Fontini & Michele Moretto, 2025. "Optimal investment in an energy storage system," Working Papers 2025.06, Fondazione Eni Enrico Mattei.

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    Keywords

    Financial Economics; Production Economics; Resource/Energy Economics and Policy;
    All these keywords.

    JEL classification:

    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q55 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Technological Innovation
    • C80 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - General

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