Capacity Remuneration Mechanisms for Reliability in the Integrated European Electricity Market: Effects on Welfare and Distribution through 2023

Thure Traber

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    Abstract

    A reduced attractiveness of investments in reliable fossil power plants in liberalized markets on the background of a transition towards renewable energies has brought a discussion on capacity policies to Europe. I develop a partial equilibrium model to compare effects of three polar capacity emuneration mechanisms (CRMs) based on the assumption that a CRM is indicated. A strategic reserve (SR) policy with administratively set capacity targets, a capacity market (CM) based on public procurement, and a decentralized reserve market with the obligation of generators to finance reserves in relation to their
    peak supply (RM). Substantial differences of policies arise across countries and regarding consumers and producers due to power plant structures. By 2023, we find the decentralized RM to induce least pronounced distributional effects and only modest welfare reductions, while SR and CM induce higher
    losses. In the longer term until 2033, welfare results differ less pronounced, although the RM is most
    friendly to consumers. A robust policy conclusion has to pay attention to further aspects concerning the
    environment and technological developments.
    Original languageEnglish
    JournalUtilities Policy
    Volume46
    Pages (from-to)1-14
    ISSN0957-1787
    DOIs
    Publication statusPublished - 2017

    Keywords

    • Electricity market
    • Capacity mechanism
    • Investment model

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