Capacity adequacy in power markets facing energy transition: A comparison of scarcity pricing and capacity mechanism

Authors

Marie Petiteta, Dominique Finonb, Tanguy Janssen

Abstract

This article analyses how a capacity mechanism can address security of supply objectives in a power market
undergoing an energy transition that combines energy efficiency efforts to stabilise demand and a rapid increase
in the proportion of renewables. To analyse this situation, power markets are simulated over the long term with
a System Dynamics model integrating new investment and closure decisions. This last trait is relevant to
studying investment in power generation in mature markets undergoing policy shocks. The energy-only market
design with a price cap, with and without a capacity mechanism, is compared to scarcity pricing in two
investment behaviour scenarios with and without risk aversion. The results show that the three market designs
lead to different levels of risk for peaking unit investment and results thus differ according to which risk
aversion hypothesis is adopted. Assuming a risk-neutral investor, the results indicate that compared to an
energy-only market with a price cap at 3 000 €/MWh, an energy-only market with scarcity pricing and the
market design with a capacity mechanism are two efficient options to reach similar levels of load loss. But under
the hypothesis of risk aversion, the results highlight the advantage of the capacity mechanism over scarcity
pricing.

Energy Policy 103 (2017)