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Investment vs. Refurbishment: Examining Capacity Payment Mechanisms Using Mixed Complementarity Problems With Endogenous Probability

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  • Lynch, Muireann Á.
  • Devine, Mel

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 mixed complementarity problem with endogenous probabilities 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

  • Lynch, Muireann Á. & Devine, Mel, 2015. "Investment vs. Refurbishment: Examining Capacity Payment Mechanisms Using Mixed Complementarity Problems With Endogenous Probability," Papers WP507, Economic and Social Research Institute (ESRI).
  • Handle: RePEc:esr:wpaper:wp507
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    File URL: http://www.esri.ie/pubs/WP507.pdf
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    References listed on IDEAS

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    1. Cramton, Peter & Stoft, Steven, 2008. "Forward reliability markets: Less risk, less market power, more efficiency," Utilities Policy, Elsevier, vol. 16(3), pages 194-201, September.
    2. Di Cosmo, Valeria & Hyland, Marie, 2013. "Carbon tax scenarios and their effects on the Irish energy sector," Energy Policy, Elsevier, vol. 59(C), pages 404-414.
    3. Peter Cramton & Steven Stoft, 2005. "A Capacity Market that Makes Sense," Papers of Peter Cramton 05licap, University of Maryland, Department of Economics - Peter Cramton, revised 2005.
    4. Cramton, Peter & Stoft, Steven, 2005. "A Capacity Market that Makes Sense," The Electricity Journal, Elsevier, vol. 18(7), pages 43-54.
    5. Abbott, Malcolm, 2001. "Is the Security of Electricity Supply a Public Good?," The Electricity Journal, Elsevier, vol. 14(7), pages 31-33.
    6. Haikel Khalfallah, 2011. "A Game theoretic model for generation capacity adequacy: Comparison between investment incentive mechanisms in electricity markets," Post-Print halshs-00743195, HAL.
    7. Cramton Peter & Katzman Brett E, 2010. "Reducing Healthcare Costs Requires Good Market Design," The Economists' Voice, De Gruyter, pages 1-4.
    8. De Vries, Laurens J., 2007. "Generation adequacy: Helping the market do its job," Utilities Policy, Elsevier, vol. 15(1), pages 20-35, March.
    9. Troy, Niamh & Denny, Eleanor & O'Malley, Mark, 2010. "Base-load cycling on a system with significant wind penetration," MPRA Paper 34848, University Library of Munich, Germany.
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    Cited by:

    1. 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.
    2. Devine, Mel & Bertsch, Valentin, 2016. "Examining the Benefits of Load Shedding Strategies using a Rolling-Horizon Stochastic Mixed Complementarity Equilibrium Model," Papers WP541, Economic and Social Research Institute (ESRI).

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