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A Capacity Market to Improve the Transition towards Sustainable Electricity Generation

Author

Listed:
  • Sebastian Schäfer

    (University of Siegen)

  • Lisa Schulten

    (University of Marburg)

Abstract

A capacity mechanism next to the energy-only market provides necessary investment incentives that spot markets lack. We suggest a capacity market which also accounts for the current transition to a higher share of renewable energy. This creates a powerful regulation to improve the transition process. We show that an increasing share of renewables leads to a comparative advantage for peak-load power plants in a capacity market. This results in higher flexibility as opposed to missing flexibility induced by the merit order effect at the spot market. Capacity mechanisms do not account for the effects caused by promoting renewable energy so far. We consider these effects via endogenous discrimination of prices paid for offered capacity. This triggers more efficient incentives to direct the capacity mix to its long-run equilibrium where discriminated prices converge to one equilibrium capacity price.

Suggested Citation

  • Sebastian Schäfer & Lisa Schulten, 2014. "A Capacity Market to Improve the Transition towards Sustainable Electricity Generation," MAGKS Papers on Economics 201439, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    • Handle: RePEc:mar:magkse:201439
    as

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    File URL: http://www.uni-marburg.de/fb02/makro/forschung/magkspapers/39-2014_schaefer.pdf
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    References listed on IDEAS

    as
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    3. Sensfuß, Frank & Ragwitz, Mario & Genoese, Massimo, 2007. "The merit-order effect: a detailed analysis of the price effect of renewable electricity generation on spot market prices in Germany," Working Papers "Sustainability and Innovation" S7/2007, Fraunhofer Institute for Systems and Innovation Research (ISI).
    4. Joskow, Paul L., 2008. "Capacity payments in imperfect electricity markets: Need and design," Utilities Policy, Elsevier, vol. 16(3), pages 159-170, September.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Capacity Markets; Electricity Markets; Resource Adequacy; Reliability Options; Renewable Energy; Merit Order Effect;
    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
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities

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