Capacity expansion in liberalized electricity markets with locational pricing and renewable energy investments.

Oliveira, Fernando S.; William-Rioux, Bertrand; Pierru, Axel

Abstract

We study the long-term incentives for expanding production capacity in liberalized electricity markets. How does electricity market design affect the prices of energy, capacity and social welfare? And how is this capacity market affected by the geographical features of the electricity market? Should the system operator design the capacity market to provide incentives for investment in renewable technologies? We analyze the conditions under which capacity payments and markets enable higher investment relative to an energy-only market in which generators sell electricity but not capacity. We show that capacity markets benefit consumers and investors by increasing investment and reliability and capping peak prices. We prove that generators benefit from owning a portfolio of peak and baseload plants and show that investment strategies must consider regional capacity auctions. We demonstrate that a capacity payment per technology increases investment in renewable technologies and leads to the early retirement of older, carbon-emitting technologies. Regional capacity investment targets effectively decrease energy prices and significantly increase investment in renewable technologies.

Citation

OLIVEIRA, F.S., WILLIAM-RIOUX, B. and PIERRU, A. 2023. Capacity expansion in liberalized electricity markets with locational pricing and renewable energy investments. Energy economics [online], 127(B), article number 106958. Available from: https://doi.org/10.1016/j.eneco.2023.106958

• Journal Article Type: Article
• Acceptance Date: Aug 15, 2023
• Online Publication Date: Oct 23, 2023
• Publication Date: Nov 30, 2023
• Deposit Date: Oct 27, 2023
• Publicly Available Date: Oct 27, 2023
• Journal: Energy economics
• Print ISSN: 0140-9883
• Electronic ISSN: 1873-6181
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 127
• Issue: B
• Article Number: 106958
• DOI: https://doi.org/10.1016/j.eneco.2023.106958
• Keywords: Auctions and mechanism design; Capacity planning; Electricity markets; Game theory; Renewable energy; Stochastic methods; Energy prices; Renewable energy investment
• Public URL: https://rgu-repository.worktribe.com/output/2121338