An analysis of a forward capacity market with long-term contracts

• Published in: Energy policy Vol. 111; pp. 255 - 267
• Main Authors: Bhagwat, Pradyumna C., Marcheselli, Anna, Richstein, Jörn C., Chappin, Emile J.L., De Vries, Laurens J.
• Format: Journal Article
• Language: English
• Published: Kidlington Elsevier Ltd 01-12-2017; Elsevier Science Ltd
• Subjects: Adequacy; Adequacy policy; Agent-based modeling; Alternative energy sources; Capacity markets; Capacity mechanisms; Consumers; Contracts; Effectiveness; Electric power generation; Electric power plants; Electricity; Electricity market; Energy policy; Energy sources; Investment; Investments; Markets; Power plants; Prices; Pricing; Renewable energy; Renewable energy sources; Renewable resources; Security; Security of supply; United Kingdom > UK; Capacity markets; Adequacy policy; Agent-based modeling; Capacity mechanisms; Security of supply; Electricity market
• ISSN: 0301-4215; 1873-6777
• DOI: 10.1016/j.enpol.2017.09.037

We analyze the effectiveness of a forward capacity market (FCM) with long-term contracts in an electricity market in the presence of a growing share of renewable energy. An agent-based model is used for this analysis. Capacity markets can compensate for the deteriorating incentive to invest in controllable power plants when the share of variable renewable energy sources grows, but may create volatile prices themselves. Capacity markets with long-term contracts have been developed, e.g. in the UK, to stabilize capacity prices. In our analysis, a FCM is effective in providing the required adequacy level and leads to lower cost to consumers and more stable capacity prices, as compared to a yearly capacity market. In case of a demand shock, a FCM may develop an investment cycle, but it still maintains security of supply. Its main effect on the power plant portfolio is more investment in peak plant.
•Analysis of a forward capacity market (FCM) with long term contracts is presented.•An agent-based model of electricity markets is utilized for this analysis.•The forward capacity market (FCM) is compared to a yearly capacity market (YCM).•FCM is effective in providing required adequacy level, including in the case of a demand shock.•FCM leads to lower costs to consumers and more stable capacity market prices compared to a YCM.