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A Principal-Agent approach to Capacity Remuneration Mechanisms

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  • Cl'emence Alasseur
  • Heythem Farhat
  • Marcelo Saguan

Abstract

We propose to study electricity capacity remuneration mechanism design through a Principal-Agent approach. The Principal represents the aggregation of electricity consumers (or a representative entity), subject to the physical risk of shortage, and the Agent represents the electricity capacity owners, who invest in capacity and produce electricity to satisfy consumers' demand, and are subject to financial risks. Following the methodology of Cvitanic et al. (2017), we propose an optimal contract, from consumers' perspective, which complements the revenue capacity owners achieved from the spot energy market, and incentivizes both parties to perform an optimal level of investments while sharing the physical and financial risks. Numerical results provide insights on the necessity of a capacity remuneration mechanism and also show how this is especially true when the level of uncertainties on demand or production side increases.

Suggested Citation

  • Cl'emence Alasseur & Heythem Farhat & Marcelo Saguan, 2019. "A Principal-Agent approach to Capacity Remuneration Mechanisms," Papers 1911.12623, arXiv.org, revised Sep 2020.
    • Handle: RePEc:arx:papers:1911.12623
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    References listed on IDEAS

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    Cited by:

    1. Emma Hubert, 2023. "Continuous-time incentives in hierarchies," Finance and Stochastics, Springer, vol. 27(3), pages 605-661, July.

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