An Extended Analysis on the Remuneration of Capacity under Scarcity Conditions

This paper extends a recent analysis which investigated the impact of scarcity adders produced by operating reserve demand curves on the financial viability of generation units in the Belgian market. Our paper is inspired by practical considerations related to the implementation of the mechanism in European electricity markets. We are specifically interested in: (i) the extent to which the mechanism rewards flexible resources for being available 'when and where' needed, as required by European competition law; (ii) the sensitivity of the mechanism to certain parameters that require regulatory judgment; (iii) the interaction of the mechanism with indirect capacity mechanisms; and (iv) the ability of the mechanism to provide long-term investment signals. We find that the restoration of nuclear capacity in the Belgian market would suppress scarcity adders to near-zero values. We show that the increase in value of lost load would have a minor impact on scarcity adders when capacity shortages are negligible. We find that the removal of strategic reserve from the Belgian market would have a significant impact on scarcity adders. We find strong positive correlation in consecutive imbalance increments, and show that this correlation can result in noticeable impact on the computation of scarcity adders. We demonstrate that the back-propagation of scarcity adders is essential for providing a long-term investment signal to flexible resources.