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The push for clean energy has caused a rapid growth of renewables in the electricity supply mix of the EU. Although one would assume that the impact of these technologies is entirely positive, recent research and experience indicate that there is reason for concern namely regarding the security of supply. In this context, the concern is how renewable energy sources (RES) affect the business case of conventional power generation. In response to this concern, capacity mechanisms are being considered or have already been implemented by various member states of the EU. However, in a highly interconnected electricity system, such as the one in Europe, there appears to be a risk that the uncoordinated implementation of capacity mechanisms may cause unintended cross-border effects. This research explored the performance of various capacity mechanisms in an electricity system with a strong growth in the portfolio share of variable renewable energy sources (RES). The cross-border effects of implementing various capacity mechanisms in an interconnected power system were also analyzed. In this research, two capacity mechanisms, namely a strategic reserve and a capacity market, were modeled as extensions to the EMLab-Generation agent-based model. Furthermore, two variations of a capacity market were analyzed. The first was a yearly capacity market design and the second was a forward capacity market with long term contracts. A survey of experts on the US capacity markets supplemented the modeling work with practical insights. QC 20161006The Doctoral Degrees issued upon completion of the programme are issued by Comillas Pontifical University, Delft University of Technology and KTH Royal Institute of Technology. The invested degrees are official in Spain, the Netherlands and Sweden, respectively.copyright (c) 2016 P. C. Bhagwat

In Germany and beyond, various capacity mechanisms are currently being discussed with a view to improving the security of electricity supply. One of these mechanisms is a strategic reserve that retains generation capacity for use in times of critical supply shortage. We argue that strategic reserves have specific advantages compared to other capacity mechanisms in the context of the European energy transition. To date, however, the debate on capacity mechanisms has largely been restricted to national contexts. Against this background, we discuss the feasibility and potential benefits of coordinated cross-border strategic reserves to safeguard electricity supply and aid the energy transition in Germany and neighboring countries at large. Setting aside strategic reserve capacity which is deployed only in the event of extreme supply shortages could improve the security of electricity supply without distorting the EU’s internal electricity market. In addition, overall costs may decrease when reserve procurement and activation are coordinated among countries, particularly if combined with flow-based market coupling.

The report is the deliverable D7.2.4 of the Working Task 7.2 in the 4th and 5th funding periods in the Smart Grids and Energy Markets (SGEM) research programme. This study approaches the power capacity question from various viewpoints. In the report, we first look at the related question of investment under uncertainty from theoretical viewpoint. The market price of electricity must stay for long periods on a much higher level than the average production cost before we can expect it to induce any new purely market-based investments. We secondly look at different capacity mechanisms and especially at Britain's new capacity mechanism, which we analyse. Practical arrangements and numerical market data present added value to the more theory-oriented discussions on capacity markets in our previous SGEM report. The Nordic market is one of the most advanced, if not the most advanced, power markets in the world. The wholesale market is mainly energy based, with special arrangements for reserve power (capacity). Our third focus lies on the question of how will new and especially adjustable regulating power capacity be induced to the Nordic market and what is the role of smart endusers? The profitability of condensing power plants is seen as a key question related to need of capacity solutions. According to our simulations of the Nordic electricity markets, assuming the increase of electricity from renewable energy sources goes according to national plans, we see that condensing power production in the Nordic market in 2035 will dwindle to 4 to 6 TWh in a normal year, 1-2% of the demand. The market price of electricity in 2035 will not either support investments in condensing power capacity. If new condensing power capacity is needed for the short term management of intermittent wind power, and that is a big and interesting if, it has to be reimbursed otherwise. However, the alternative to new capacity, and capacity mechanisms, is Smart Grids and end-user flexibility. The Nordic countries have great opportunities for flexibility with a high heat demand and widespread district and electric heating, and vehicles might to some extent be electric by 2035.

The report is the deliverable D7.2.4 of the Working Task 7.2 in the 4th and 5th funding periods in the Smart Grids and Energy Markets (SGEM) research programme. This study approaches the power capacity question from various viewpoints. In the report, we first look at the related question of investment under uncertainty from theoretical viewpoint. The market price of electricity must stay for long periods on a much higher level than the average production cost before we can expect it to induce any new purely market-based investments. We secondly look at different capacity mechanisms and especially at Britain's new capacity mechanism, which we analyse. Practical arrangements and numerical market data present added value to the more theory-oriented discussions on capacity markets in our previous SGEM report. The Nordic market is one of the most advanced, if not the most advanced, power markets in the world. The wholesale market is mainly energy based, with special arrangements for reserve power (capacity). Our third focus lies on the question of how will new and especially adjustable regulating power capacity be induced to the Nordic market and what is the role of smart endusers? The profitability of condensing power plants is seen as a key question related to need of capacity solutions. According to our simulations of the Nordic electricity markets, assuming the increase of electricity from renewable energy sources goes according to national plans, we see that condensing power production in the Nordic market in 2035 will dwindle to 4 to 6 TWh in a normal year, 1-2% of the demand. The market price of electricity in 2035 will not either support investments in condensing power capacity. If new condensing power capacity is needed for the short term management of intermittent wind power, and that is a big and interesting if, it has to be reimbursed otherwise. However, the alternative to new capacity, and capacity mechanisms, is Smart Grids and end-user flexibility. The Nordic countries have great opportunities for flexibility with a high heat demand and widespread district and electric heating, and vehicles might to some extent be electric by 2035.

In Germany and beyond, various capacity mechanisms are currently being discussed with a view to improving the security of electricity supply. One of these mechanisms is a strategic reserve that retains generation capacity for use in times of critical supply shortage. We argue that strategic reserves have specific advantages compared to other capacity mechanisms in the context of the European energy transition. To date, however, the debate on capacity mechanisms has largely been restricted to national contexts. Against this background, we discuss the feasibility and potential benefits of coordinated cross-border strategic reserves to safeguard electricity supply and aid the energy transition in Germany and neighboring countries at large. Setting aside strategic reserve capacity which is deployed only in the event of extreme supply shortages could improve the security of electricity supply without distorting the EU's internal electricity market. In addition, overall costs may decrease when reserve procurement and activation are coordinated among countries, particularly if combined with flow-based market coupling.

In many European jurisdictions, capacity remuneration mechanisms are either in use or their implementation is being discussed. In light of falling prices on the wholesale markets for electricity, these mechanisms are meant to generate revenues over and above energy-only market revenues in order for power plants to be able to recover their fixed costs and ensure a reliable energy supply. In the first part of this paper, we present a framework for discussing the different types of capacity remuneration mechanisms currently in operation or under discussion. In a next step, we take a closer look at the implementation status of these mechanisms in France, Germany, and Italy, Switzerland’s main electricity import and export partners. Whereas capacity mechanisms are in place in France and Italy, in Germany the process intended to lead to an overhaul of the current market design is still ongoing.

To ensure security of supply in liberalized electricity markets, different types of capacity mechanisms are currently being debated or have recently been implemented in many European countries. The purpose of this study is to analyze the cross-border effects resulting from different choices on capacity mechanisms in neighboring countries. We consider a model with two connected countries that differ in the regulator's choice on capacity mechanism, namely strategic reserves or capacity payments. In both countries, competitive firms invest in generation capacity before selling electricity on the spot market. We characterize market equilibria and find the following main result: While consumers' costs may be the same under both capacity mechanisms in non-connected countries, we show that the different capacity mechanisms in interconnected countries induce redistribution effects. More precisely, we find that consumers' costs are higher in countries in which reserve capacities are procured than in countries in which capacity payments are used to ensure the targeted reliable level of electricity.

Sigurnost opskrbe električnom energijom ključna je za ekonomski i socijalni razvoj svakoga društva. Liberalizacijom tržišta električne energije došlo je do promjena u procesu odlučivanja o investiranju u nove proizvodne kapacitete što je uzrokovalo sumnju u adekvatnost trenutnih ulaganja. Uzimajući u obzir skori prestanak rada značajnog dijela proizvodnih postrojenja u Hrvatskoj, jasno je da će pretpostavljeni porast u potražnji za električnom energijom biti sve teže zadovoljiti. Ušteđena energija kao rezultat povećanja energetske učinkovitosti, može se smatrati svojevrsnim novim izvorom energije. Cilj ovoga rada odgovoriti je na pitanje: „Je li ekonomski isplativije ulagati javni novac u izgradnju novih proizvodnih kapaciteta ili u sveobuhvatne mjere poboljšanja energetske učinkovitosti?“. Zaključak rada proizlazi iz usporedbe niveliranog troška proizvedene električne energije (eng. levelized cost of electricity) izračunatog za tri različita tipa proizvodnih postrojenja i troška energetske uštede (eng. energy saving cost) mjera energetske učinkovitosti. Uz to, analiziran je problem vršnog kapaciteta i povrata fiksnih troškova proizvodnih postrojenja te je zaključeno kako je potrebno implementirati određeni mehanizam kompenzacije kapaciteta kako bi se osigurao povrat investicijskog kapitala i potaknulo ulaganje u nova proizvodna postrojenja. Security of energy supply is a key to social and economic development of society. Liberalization of power market has brought changes in the process of decision making regarding new investments in power system and certain concerns arise related to adequacy of the present investments. Taking into consideration that significant amount of generating capacities in Croatian power system will be shut down in the following years, it will be even more challenging to satisfy a growing demand. Energy saved through energy efficiency measures can be considered an alternative source of energy. Within this thesis a question has been answered whether it is more economically feasible to invest public money in new generating capacities or to invest it in large-scale energy efficiency improvements. The answer has been provided through calculating levelized cost of electricity of three different electricity generating options and comparing it to energy saving costs of currently proposed energy efficiency measures. Furthermore, the problem of peaking capacity and fixed costs recovery has been analyzed. It has been concluded that a certain capacity mechanism is needed in order to ensure investment costs recovery and stimulate investments.

This article analyses cross-border effects of capacity mechanisms and discusses whether such mechanisms countervail the goals of European Market Integration. Using a two-country-model, the countries' policy options are analysed from a game-theoretical viewpoint. A model simulation identifies the main effects on investments, trade, and overall welfare. We find that a strategic reserve and reliability options have both negative cross-border effects if implemented unilaterally. This exerts pressure on the neighbouring country to change its market design as well. Given that both countries chose their optimal market design, however, the Nash Equilibrium is welfare improving from an overall point of view. Reliability options are superior to a strategic reserve as they avoid a non-market-based dispatch of generation and thus increase market trade and welfare. Furthermore, surpluses are redistributed from producers to consumers, which serves overall welfare if the focus is on consumer benefits.

At the first years of deregulation, the academic discussion was first oriented to discuss the short-term efficiency and competitiveness of the electricity markets. Now, after more than twenty years of deregulation, the issue of the long-term security of supply has become increasingly relevant. A number of authors have used simulations and laboratory experiments to study capacity mechanisms in order to address this issue. This thesis explores the rationality of individuals’ decisions in a set of pilot experimental markets to test capacity mechanisms in electricity markets. We start from a previous experiment as base case, which is presented by Arango and Moxnes (2012).Thereafter; we take the second treatment with the capacity mechanism Procurement for long strategic reserve planning, by introducing a regulatory firm to the base case market. The third treatment test the capacity mechanism Centralized auctioning for capacity contracts, by introducing an auction for licenses system. We compare three treatments with six pilot experimental markets, two per treatment. We evaluate the performance in terms of the market’s long-term security of supply and the society’s welfare. Results from the pilot experiments provides only initial indications about the experiment. In Treatments 1 and 2, the experimental results show evidence of cyclical behavior in both prices and capacities. On the other hand, in Treatment 3, the experimental results show a more stable behavior due to the introduced auction for licenses system. Although the simulation tests indicate that both Treatments 2 and 3 should exhibit more stable behaviors in prices and capacities than Treatment 1, Treatment 2’s experimental results do not represent an improvement with respect to Treatment 1’s ones. In fact, results suggest that the regulatory firm introduced by Treatment 2 -Procurement for long strategic reserve planning- represents the less desirable scenario for market actors. On the contrary, Treatment 3’s experimental results are consistent with the simulation tests. In addition, the auction for licenses system introduced by Treatment 3 Centralised auctioning for capacity contracts- leads to more stable behaviors than both Treatments 1 and 2 results. These results suggest, first, that the Centralised auctioning for capacity contracts could help to stabilize the market without significant costs for the society’s welfare, and second, that the Procurement for long strategic reserve planning may not lead to any price stabilization or society’s welfare improvement Resumen: En los primeros años de la desregulación, la discusión académica fue primeramente orientada a discutir la eficiencia y competitividad de los mercados de electricidad en el corto plazo. Ahora, después de más de veinte años de la desregulación, la cuestión de la seguridad de suministro en el largo plazo es cada vez más relevante. Un número de autores han utilizado simulaciones y experimentos de laboratorio para estudiar los mecanismos de capacidad con el fin de abordar esta cuestión. En esta tesis se analiza la racionalidad de las decisiones de los individuos en un conjunto de mercados experimentales piloto para poner a prueba los mecanismos de capacidad en los mercados eléctricos. Partimos de un experimento anterior como caso base, que es presentado por Arango y Moxnes (2012). A partir de entonces, Tomamos el segundo tratamiento con el mecanismo de Contratación de capacidad para la planificación estratégica de reservas, mediante la introducción de una firma reguladora para el mercado de caso base. El tercer tratamiento prueba el mecanismo Subastas centralizadas para contratos de capacidad, mediante la introducción de una subasta para el sistema de licencias. Comparamos tres tratamientos con seis mercados experimentales piloto, dos por tratamiento. Evaluamos el desempeño de los mecanismos en términos de seguridad de suministro en el largo plazo y el bienestar de la sociedad de mercado. Los resultados de los experimentos piloto proporcionan sólo indicaciones iniciales sobre el experimento. En los tratamientos 1 y 2, los resultados experimentales muestran evidencia de comportamiento cíclico en los precios y las capacidades. Por otra parte, en el tratamiento 3, los resultados experimentales muestran un comportamiento estable debido a la introducción de las subastas por licencias. A pesar que las pruebas de simulación indican que tanto el Tratamiento 2 y 3 deberían exhibir comportamientos más estables en precios y capacidades que el tratamiento 1, los resultados experimentales del tratamiento 2 no representan una mejora con respecto a los resultados del tratamiento 1. De hecho, los resultados sugieren que la firma reguladora introducida en por Tratamiento 2 – Contratación para la planificación de reservas estratégicas a largo plazo- representa el escenario menos deseable para los actores de mercado. Por otra parte, los resultados experimentales del tratamiento 3 son consistentes con las pruebas de simulación. Adicionalmente, el sistema de licencias introducido en el tratamiento 3 - Subastas centralizadas por licencias de capacidad- lleva a comportamientos más estables que los presentados por los tratamientos 1 y 2. Estos resultados sugieren, primero, que las Subastas centralizadas para los contratos de capacidad podrían ayudar a estabilizar el mercado sin costos significativos para el bienestar de la sociedad y segundo, que la Contratación para la planificación de reservas estratégicas a largo plazo podría no conducir ninguna estabilización de precios o mejora para el bienestar de la sociedad Maestría

Liberalized electricity markets are characterized by a fluctuating price-inelastic demand, non-storable electricity and often show substantial market shares held by one or few incumbent firms. These characteristics have led to a controversial discussion concerning the need for and the design of capacity mechanisms, which combine some form of capacity payments with price caps in the spot market. The purpose of this study is to understand the effects of different capacity mechanisms on the market structure. We consider a model with a dominant firm and a competitive fringe and investigate the impact of price caps and capacity payments on investment incentives and market shares of both parties. While lower price caps reduce the potential for the exercise of market power in static models, we find that in the dynamic model with endogenous investments lower price caps increase market concentration and the frequency of capacity withholding, as well as, the dominant firm's profits.

For ensuring electricity security of supply in the long run, liberalised electric systems’ regulators have to worry, not only about the presence of enough installed capacity, but also about the generation mix. Hence, indicative planning must be taken into account as well, for limiting dependence upon nonindigenous fuels, for instance. This can, simultaneously, help in meeting growing environmental constraints: renewables promotion is a clear example. There exist several mechanisms for addressing the adequacy problem (having enough megawatts) and for promoting renewables (having the good megawatts). In this study, a brief review of these mechanisms is done, and some are chosen for assessing their efficacy and efficiency over a system similar to the Spanish one, concretely capacity payments and capacity markets for the first problem and renewable energy premiums for the second. A simulation study is performed, which confirms the better characteristics of capacity markets in stabilising reserve margins, but whose effects may be damaged by an inadequate renewables promotion policy.