Capacity Market Mechanism Analyses: a Literature Review
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ENERGY MARKETS (R SIOSHANSI AND A MOUSAVIAN, SECTION EDITORS)
Capacity Market Mechanism Analyses: a Literature Review Joseph E. Duggan Jr. 1,2 Accepted: 29 September 2020 # Springer Nature Switzerland AG 2020
Abstract Purpose of Review This paper focuses on providing an overview of research into different capacity market mechanisms. Beginning with the idea of the energy-only market and the resulting potential concerns of the missing money problem, this survey overviews a variety of studies of different capacity mechanisms, considering issues such as market power, risk attitudes, uncertainty, and pricing rules. Papers of specific interest to particular ISOs/RTOs are also discussed. Recent Findings Previous studies tend to show the advantages of utilizing capacity market mechanisms in lieu of relying solely upon energy-only markets, particularly in the presence of risk-averse investors or the potential exercise of market power. Summary The findings discussed herein indicate the continued importance of studying capacity market mechanisms, particularly as electricity markets continue to evolve with the advent of increasing levels of renewable regeneration and the potential of storage. Keywords Capacity markets . Resource adequacy . Missing money . Price formation . Review
Introduction In this survey, various theoretical analyses of capacity market mechanisms are reviewed. In addition, studies with an emphasis on or relevance to specific regional transmission organizations (“RTOs”) and independent system operators (“ISOs”) in the USA are also discussed. Capacity market mechanisms have become an increasingly important component of electricity market designs given the unique structural characteristics of electricity energy markets as well as the increasing transition towards renewable generation [1•]. A useful overview of the fundamental rationale of capacity markets and the particular market failures they are meant to address can be found in [2, 3]. Capacity markets and electricity market design are subject to periodic reviews in the literature given the evolving nature of these institutions. Byers et al. [1•] review the design of capacity markets with respect to This article is part of the Topical Collection on Energy Markets * Joseph E. Duggan, Jr. [email protected] 1
Department of Economics and Finance, University of Dayton, 300 College Park, Dayton, OH 45469-2251, USA
2
Hanley Sustainability Institute, University of Dayton, 300 College Park, Dayton, OH 45469-2251, USA
increasing levels of variable renewable energy. Bublitz et al. [4••] provide an extensive survey of various capacity remuneration mechanisms and the debate regarding the necessity of capacity remuneration mechanisms, as well as an overview of modeling approaches regarding various electricity market designs. Bushnell et al. [5] provide an overview of important design considerations two decades after the initial restructuring of power markets, with a particular emphasis on the trends of low average energy prices, the rise of alternative resource
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