Ensuring capacity adequacy during energy transition in mature power markets: a social efficiency comparison of scarcity pricing and capacity mechanism

Authors

Marie Petitet, Dominique Finon, Tanguy Janssen

Abstract

This paper analyses how a capacity market mechanism can address security of supply objectives in the case of an energy transition scenario which combines both high energy efficiency efforts which stabilise demand in a context of mature markets and rapid increase of renewables share. The exogenous entry of variable renewables introduces a new challenge in matter of security of supply during peak hours. To analyse this situation, power markets are simulated on the long term with a model based on System Dynamics modelling which integrates both new investment and closure decisions. This last trait is an originality of the model which is very relevant to study market maturity. The addition of a capacity mechanism in a market architecture with price cap is compared to scarcity pricing in different situations. Simulations are performed for two different cases: a case without any exogenous closure of existing power plants and a case with exogenous retirements which create a need of new investments. Under the assumption of a risk-neutral investor, the results indicate that compared to an energy-only market with price cap set at €3,000/MWh, energy-only with scarcity pricing and capacity mechanism are two efficient market designs to reach an acceptable level of loss of load. Besides, the results highlight that the advantage of one design on the other in terms of social efficiency depends on the future scenarios which are simulated. Moreover, the results illustrates that the three market designs lead to different level of risk for peaking units, suggesting that including risk aversion is a relevant further step in the modelling.