Asymmetric risk and fuel neutrality in electricity capacity markets

Abstract

In many liberalized electricity markets, power generators can receive payments for maintaining capacity through capacity markets. These payments help stabilize generator revenues, making investment in capacity more attractive for risk-averse investors when other outlets for risk trading are limited. Here we develop a heuristic algorithm to solve large-scale stochastic equilibrium models describing a competitive market with incomplete risk trading. Introduction of a capacity mechanism has an asymmetric effect on the risk profile of different generation technologies, tilting the resource mix towards those with lower fixed costs and higher operating costs. One implication of this result is that current market structures may be ill-suited to financing low-carbon resources, the most scalable of which have high fixed costs and near-zero operating costs. Development of new risk trading mechanisms to replace or complement current capacity obligations could lead to more efficient outcomes.

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Fig. 1: Decline of baseload capacity with increased options trading.

Data availability

The code and data used for numerical tests in this study are available in a public repository (https://doi.org/10.5281/zenodo.3242844).

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Acknowledgements

This research was supported, in part, by Northwestern University’s Center for Optimization and Statistical Learning. The views expressed in this article are not necessarily those of the Federal Energy Regulatory Commission.

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Contributions

J.M. planned and performed the analysis. D.P.M. reviewed the manuscript, in particular with reference to the models and algorithm. R.P.O. reviewed the manuscript, in particular with reference to the electricity market design.

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Correspondence to Jacob Mays.

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Supplementary Information

Supplementary notes 1–5, Tables 1 and 2 and refs. 1–8.

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Mays, J., Morton, D.P. & O’Neill, R.P. Asymmetric risk and fuel neutrality in electricity capacity markets. Nat Energy 4, 948–956 (2019). https://doi.org/10.1038/s41560-019-0476-1

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