Capacity Remuneration Mechanisms and Interconnected National Electricity Markets (Capacity Remuneration)

Abstract:

The project focusses on the question which electricity market design can address the new challenges for the security of supply best which arise from the ambitious European renewable energy targets. It theoretically models two different design alternatives, capacity markets and strategic reserves, in the framework of three stage games where oligopolistic firms first invest, then bid in either a capacity market or a strategic reserve procurement auction, and finally bid electricity prices in the energy market. In a first step it compares the costs of the two capacity remuneration mechanisms for the same increase in the investment incentive. Then the project considers a two-country model with a cross border transmission line for limited export or import. In this framework the repercussion, a foreign capacity remuneration mechanism has on the domestic market, is investigated, and whether the domestic country can gain from implementing the same or the other mechanism.