Optimal remuneration schemes ensuring efficient operational short-term reliability and long-term adequacy of the electricity system

Striving for a more sustainable society is strongly dependent on the transition of the energy system. Concerning the power system, there are three pillars which are crucial for a sustainable transition: decarbonization, security of supply, and competitiveness. Trying to balance these three pillars is necessary but has presented a number of challenges.

Emerging concerns about the long-term generation adequacy and market adequacy, as well as challenges to the short-term reliability can also be linked to the three pillars. The decarbonization of the power system has led to a paradigm shift from technologies with low investment cost and high fuel cost to new technologies with high investment cost and low fuel costs, as is the case for Renewable Energy Sources (RES). The question arises if the current market design can cope with this development. Incentives to invest in long-term generation adequacy have to emerge from a combination of market signals and decision-making of individual market participants. Yet, in current markets, the adequacy of the market signals is doubted. One proposed market mechanism to address these challenges is a complementary capacity mechanism (CM). A CM explicitly assigns a value to the contribution of the different technologies to the generation adequacy.

The purpose of this doctoral research is to better understand the working principle and the outcome of market designs including a CM. The research examines the role of a complementary CM in existing energy market designs including markets for energy output, flexibility and RES. For that purpose, a modeling framework is developed. By means of this framework, different  CM implementation concepts,  including capacity markets and strategic reserves, can be analyzed. Each model assumes individual market participants, facing the decision to invest in generation technologies based on their accumulated revenues across the different markets. The capacity expansion problem is set up as a non-cooperative game of the market participants. The resulting equilibrium is analyzed with respect to shares and origins of revenues, impacts on the generation mix or total cost for consumers. Specifically three research questions are addressed.

First, the model is applied to assess the shift of revenues between the markets. Analysis of the changing decision-making of market participants  and the resulting generation mix is done. The findings show that with increasing RES shares, the role of energy-based markets is reduced and shifted to more specific market segments. It is noteworthy that different market settings affect both technologies participating in the CM, as well as other technologies. The latter are affected indirectly through changing prices in other market segments and changing decision-making of their competitors. In addition, the results indicate that revenues from CMs make scarcity pricing on energy-based markets partly or fully obsolete. Consequently, revenues for all technologies are less dependent on scarcity events. In the current case study cost differences between markets with and without CMs are small. Therefore further research should elaborate on market participation rules such that all technologies are able to valorize their contribution in terms of energy output, flexibility and availability.

Second, the model is used to assess the impact of CMs, harmonized or not, in a multi-zonal market context. The case study focuses on efficient use of capacity assets by means of cross-border participation in the CMs and highlights the benefits and pitfalls of implicit and explicit participation models. Cross-border effects such as capacity leakage, shared generation adequacy, and cost distribution are taken into account. The findings indicate that differing incentives in the market zones cause a distortion of the market harmonization. This leads to disturbed investment signals and in the end to a less efficient market outcome. However, even with a harmonized approach of CMs, there is a chance of under- or overestimating the cross-border participation. The consequences can be either over-investments because of too conservative assumptions about non-domestic contribution, or insufficient reserve margins because of double counting of available capacity across multiple markets.

Third, the focus of the research is shifted to the decision- making of individual market participants in the presence of uncertainties, which create major risks for capital-intensive investments. Risk-averse decision-making might lead to inadequate investments and might undermine long-term generation adequacy. The effect of CMs on risk-averse market participants is examined under different market settings. The results of the analysis show that CMs have a positive effect on the security of supply and the overall costs when market participants are risk-averse. This is due to the more stable investment signal. Furthermore, the investment signals from the CM remain sufficient, even at very high risk aversion. Finally, the results show that the positive effect of a CM cannot be achieved by increasing the price cap for energy in times of scarcity.