IDEAS home Printed from https://ideas.repec.org/a/eee/enepol/v183y2023ics0301421523004287.html
   My bibliography  Save this article

An analysis of shortage pricing and capacity remuneration mechanisms on the pan-European common energy market

Author

Listed:
  • Mou, Yuting
  • Papavasiliou, Anthony
  • Hartz, Katharina
  • Dusolt, Alexander
  • Redl, Christian

Abstract

Various market design options have been implemented or proposed in order to address the missing money problem and facilitate the energy transition. In order to analyze the performance of energy-only markets, and energy markets supplemented by shortage pricing and/or capacity remuneration mechanisms, we develop a capacity expansion model for the European system. A number of market design scenarios are simulated until the year 2050. We consider a range of sensitivity analyses so as to understand the effect of various market design options on the performance of energy markets and their variants, as well as the effects of cross-border coordination. The findings of this paper indicate that capacity remuneration mechanisms are sensitive to numerous non-obvious design parameters and can sometimes lead to over-dimensioning, even if the effect on total cost can be less pronounced, whereas shortage pricing appears as a no-regret measure because price adders recede when there is abundant flexibility in the system.

Suggested Citation

  • Mou, Yuting & Papavasiliou, Anthony & Hartz, Katharina & Dusolt, Alexander & Redl, Christian, 2023. "An analysis of shortage pricing and capacity remuneration mechanisms on the pan-European common energy market," Energy Policy, Elsevier, vol. 183(C).
    • Handle: RePEc:eee:enepol:v:183:y:2023:i:c:s0301421523004287
    DOI: 10.1016/j.enpol.2023.113843
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0301421523004287
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.enpol.2023.113843?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Joseph Bowring, 2013. "Capacity Markets in PJM," Economics of Energy & Environmental Policy, International Association for Energy Economics, vol. 0(Number 2).
    2. Petitet, Marie & Finon, Dominique & Janssen, Tanguy, 2017. "Capacity adequacy in power markets facing energy transition: A comparison of scarcity pricing and capacity mechanism," Energy Policy, Elsevier, vol. 103(C), pages 30-46.
    3. Bhagwat, Pradyumna C. & Iychettira, Kaveri K. & Richstein, Jörn C. & Chappin, Emile J.L. & Vries, Laurens J. De, 2017. "The effectiveness of capacity markets in the presence of a high portfolio share of renewable energy sources," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 48, pages 76-91.
    4. Cartuyvels, Jacques & Papavasiliou, Anthony, 2022. "Calibration of Operating Reserve Demand Curves using Monte Carlo Simulations," LIDAM Discussion Papers CORE 2022009, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    5. Kathleen Spees & Samuel A. Newell & Johannes P. Pfeifenberger, 2013. "Capacity Markets - Lessons Learned from the First Decade," Economics of Energy & Environmental Policy, International Association for Energy Economics, vol. 0(Number 2).
    6. Bhagwat, Pradyumna C. & de Vries, Laurens J. & Hobbs, Benjamin F., 2016. "Expert survey on capacity markets in the US: Lessons for the EU," Utilities Policy, Elsevier, vol. 38(C), pages 11-17.
    7. Cramton, Peter & Stoft, Steven, 2005. "A Capacity Market that Makes Sense," The Electricity Journal, Elsevier, vol. 18(7), pages 43-54.
    8. William W. Hogan, 2013. "Electricity Scarcity Pricing Through Operating Reserves," Economics of Energy & Environmental Policy, International Association for Energy Economics, vol. 0(Number 2).
    9. Komorowska, Aleksandra & Benalcazar, Pablo & Kaszyński, Przemysław & Kamiński, Jacek, 2020. "Economic consequences of a capacity market implementation: The case of Poland," Energy Policy, Elsevier, vol. 144(C).
    10. Koltsaklis, Nikolaos E. & Dagoumas, Athanasios S. & Panapakidis, Ioannis P., 2017. "Impact of the penetration of renewables on flexibility needs," Energy Policy, Elsevier, vol. 109(C), pages 360-369.
    11. Anthony Papavasiliou & Yves Smeers & Gilles Bertrand, 2018. "An extended analysis on the remuneration of capacity under scarcity conditions," LIDAM Reprints CORE 3021, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    12. Anthony PAPAVASILIOU & Yves SMEERS, 2017. "Remuneration of flexibility using operating reserve demand curves: a case study of Belgium," LIDAM Reprints CORE 2900, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    13. Cepeda, Mauricio, 2018. "Assessing cross-border integration of capacity mechanisms in coupled electricity markets," Energy Policy, Elsevier, vol. 119(C), pages 28-40.
    14. Anthony Papavasiliou & Yves Smeers, 2017. "Remuneration of Flexibility using Operating Reserve Demand Curves: A Case Study of Belgium," The Energy Journal, International Association for Energy Economics, vol. 0(Number 6).
    15. Bajo-Buenestado, Raúl, 2021. "Operating reserve demand curve, scarcity pricing and intermittent generation: Lessons from the Texas ERCOT experience," Energy Policy, Elsevier, vol. 149(C).
    16. Papavasiliou, Anthony & Cartuyvels, Jacques & Bertrand, Gilles & Marien, Alain, 2023. "Implementation of scarcity pricing without co-optimization in European energy-only balancing markets," LIDAM Reprints CORE 3269, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    17. Joskow, Paul L., 2008. "Capacity payments in imperfect electricity markets: Need and design," Utilities Policy, Elsevier, vol. 16(3), pages 159-170, September.
    18. Cartuyvels, Jacques & Papavasiliou, Anthony, 2022. "Calibration of Operating Reserve Demand Curves using Monte Carlo Simulations," LIDAM Reprints CORE 3198, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    19. Cartuyvels, Jacques & Papavasiliou, Anthony, 2022. "Calibration of Operating Reserve Demand Curves Using a System Operation Simulator," LIDAM Reprints CORE 3208, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    20. Papavasiliou, Anthony & Cartuyvels, Jacques & Bertrand, Gilles & Marien, Alain, 2023. "Implementation of scarcity pricing without co-optimization in European energy-only balancing markets," Utilities Policy, Elsevier, vol. 81(C).
    21. Anthony Papavasiliou, Yves Smeers, and Gilles Bertrand, 2018. "An Extended Analysis on the Remuneration of Capacity under Scarcity Conditions," Economics of Energy & Environmental Policy, International Association for Energy Economics, vol. 0(Number 2).
    22. Peter Cramton & Axel Ockenfels & Steven Stoft, 2013. "Capacity Market Fundamentals," Economics of Energy & Environmental Policy, International Association for Energy Economics, vol. 0(Number 2).
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Simshauser, Paul, 2020. "Merchant renewables and the valuation of peaking plant in energy-only markets," Energy Economics, Elsevier, vol. 91(C).
    2. Bublitz, Andreas & Keles, Dogan & Zimmermann, Florian & Fraunholz, Christoph & Fichtner, Wolf, 2019. "A survey on electricity market design: Insights from theory and real-world implementations of capacity remuneration mechanisms," Energy Economics, Elsevier, vol. 80(C), pages 1059-1078.
    3. Komorowska, Aleksandra & Benalcazar, Pablo & Kaszyński, Przemysław & Kamiński, Jacek, 2020. "Economic consequences of a capacity market implementation: The case of Poland," Energy Policy, Elsevier, vol. 144(C).
    4. Keppler, Jan Horst & Quemin, Simon & Saguan, Marcelo, 2022. "Why the sustainable provision of low-carbon electricity needs hybrid markets," Energy Policy, Elsevier, vol. 171(C).
    5. Simshauser, Paul, 2022. "Rooftop solar PV and the peak load problem in the NEM's Queensland region," Energy Economics, Elsevier, vol. 109(C).
    6. Bhagwat, Pradyumna C. & Marcheselli, Anna & Richstein, Jörn C. & Chappin, Emile J.L. & De Vries, Laurens J., 2017. "An analysis of a forward capacity market with long-term contracts," Energy Policy, Elsevier, vol. 111(C), pages 255-267.
    7. Bublitz, Andreas & Keles, Dogan & Zimmermann, Florian & Fraunholz, Christoph & Fichtner, Wolf, 2018. "A survey on electricity market design: Insights from theory and real-world implementations of capacity remuneration mechanisms," Working Paper Series in Production and Energy 27, Karlsruhe Institute of Technology (KIT), Institute for Industrial Production (IIP).
    8. Bhagwat, Pradyumna C. & Iychettira, Kaveri K. & Richstein, Jörn C. & Chappin, Emile J.L. & De Vries, Laurens J., 2017. "The effectiveness of capacity markets in the presence of a high portfolio share of renewable energy sources," Utilities Policy, Elsevier, vol. 48(C), pages 76-91.
    9. Christos K. Simoglou & Pandelis N. Biskas, 2023. "Capacity Mechanisms in Europe and the US: A Comparative Analysis and a Real-Life Application for Greece," Energies, MDPI, vol. 16(2), pages 1-32, January.
    10. Khan, Agha Salman M. & Verzijlbergh, Remco A. & Sakinci, Ozgur Can & De Vries, Laurens J., 2018. "How do demand response and electrical energy storage affect (the need for) a capacity market?," Applied Energy, Elsevier, vol. 214(C), pages 39-62.
    11. Bhagwat, Pradyumna C. & Richstein, Jörn C. & Chappin, Emile J.L. & Iychettira, Kaveri K. & De Vries, Laurens J., 2017. "Cross-border effects of capacity mechanisms in interconnected power systems," Utilities Policy, Elsevier, vol. 46(C), pages 33-47.
    12. Bhagwat, Pradyumna C. & Iychettira, Kaveri K. & Richstein, Jörn C. & Chappin, Emile J.L. & Vries, Laurens J. De, 2017. "The effectiveness of capacity markets in the presence of a high portfolio share of renewable energy sources," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 48, pages 76-91.
    13. Anthony Papavasiliou & Yves Smeers, 2017. "Remuneration of Flexibility using Operating Reserve Demand Curves: A Case Study of Belgium," The Energy Journal, International Association for Energy Economics, vol. 0(Number 6).
    14. Simshauser, P., 2021. "Rooftop Solar PV and the Peak Load Problem in the NEM’s Queensland Region," Cambridge Working Papers in Economics 2180, Faculty of Economics, University of Cambridge.
    15. Milstein, Irena & Tishler, Asher, 2019. "On the effects of capacity payments in competitive electricity markets: Capacity adequacy, price cap, and reliability," Energy Policy, Elsevier, vol. 129(C), pages 370-385.
    16. Simshauser, Paul, 2021. "Vertical integration, peaking plant commitments and the role of credit quality in energy-only markets," Energy Economics, Elsevier, vol. 104(C).
    17. Simshauser, Paul & Gilmore, Joel, 2022. "Climate change policy discontinuity & Australia's 2016-2021 renewable investment supercycle," Energy Policy, Elsevier, vol. 160(C).
    18. Growitsch, Christian & Just, Lisa & Pedell, Burkhard, 2014. "Risk Assessment of Investments in Energy-only and Capacity Markets," Die Unternehmung - Swiss Journal of Business Research and Practice, Nomos Verlagsgesellschaft mbH & Co. KG, vol. 68(3), pages 181-188.
    19. Simshauser, P., 2020. "Merchant utilities and boundaries of the firm: vertical integration in energy-only markets," Cambridge Working Papers in Economics 2039, Faculty of Economics, University of Cambridge.
    20. Simshauser, P. & Gilmore, J., 2020. "Is the NEM broken? Policy discontinuity and the 2017-2020 investment megacycle," Cambridge Working Papers in Economics 2048, Faculty of Economics, University of Cambridge.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:enepol:v:183:y:2023:i:c:s0301421523004287. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/enpol .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.