Resource adequacy in deregulated electricity markets : capacity mechanisms and system costs with the increased share of renewable energy

The thesis studies resource adequacy in deregulated electricity markets and the impact of increased shares of renewable energy on electricity system costs focusing on the GB market. It is composed of four substantive chapters. Chapters two and three provide a qualitative analysis of the effectiveness of capacity mechanisms in enhancing the security of electricity supply in Europe and the US by carefully reviewing the academic literature and official documents from government and regulatory agencies. The analysis covers 18 system operator (SO) regions. The second chapter focuses on the governance and legal basis of capacity mechanisms. It asks: 'How well do the legal and regulatory arrangements encourage efficient outcomes in Europe and the US capacity markets?' Since the cost of new entry (CONE) is directly related to reliability standards, this essay starts with a critical review of the legal basis and determination of reliability standards in different jurisdictions. It then analyses the legal basis, the regulatory arrangement, and the typology of capacity mechanisms in the 18 SO regions. Policy recommendations include enhancing the independence of organisations and encouraging more flexibility in the mechanism design for faster integration of newer technologies. The third chapter focuses on capacity mechanism designs and asks, 'The effectiveness of capacity mechanisms: what can we learn from market design in the US and Europe?' The analysis focuses on principles of capacity market design, the capacity contribution from dispatchable and intermittent resources, and the participation of demand-side resources. Capacity mechanisms have led to reliability gains across the SO regions; however, designs have impacted the cost of acquisition differently. While the capacity prices were more volatile in SO regions with a vertical demand curve, overcapacity was noticeable in those with administered capacity prices. Convergence in the contractual terms of old and new conventional and intermittent resources is needed to minimise market distortion. The fourth chapter examines the impact of wind power on the costs of balancing services in Great Britain (the GB) from 2007 to 2019 using an Autoregressive Distributed Lag (ARDL) and Error Correction Model (ECM) model. The results show that a one standard deviation increase in wind generation increases the average monthly real-prices, fixed to the August 2019 consumer prices index, of electricity by £1.16/MWh in the short-run and £0.64/MWh in the long run, respectively, mainly due to additional expenditure towards the constraints services. And one standard deviation increase in solar increases the total balancing cost by £0.59/MWh for the short-run and £0.27/MWh in the long run. In contrast, with the inertial and synchronous power supplies from pumped hydro storage, net other purchases (from auto-generators), bio-energy, gas and coal sources, the balancing cost of electricity decreases by approximately £14.94/MWh, £1.00/MWh, £0.77/MWh, £0.29/MWh and £0.16/MWh, respectively, due to less expenditure on the constraints services for each unit of supply. Other trades through the interconnectors reduced the price of electricity. The ECM specifications are robust and do not suffer from serial correlation and heteroskedasticity. Building upon the fourth chapter, the fifth chapter studies the least-cost power generation mix in the GB for meeting the net-zero emission target. I developed an Excel-based electricity supply model that minimises the system cost while meeting the projected electricity demand under the Future Energy Scenarios (FES) 2021 of the National Grid for the GB and the net-zero emission targets. The key findings include the following. First, the least-cost generation mix that meets the net-zero emission targets will have a higher proportion of supplies from wind energy combined with hydropower storage, anaerobic digestion (AD) energy sources, and landfill gas technologies if nuclear plants' construction cost remains close to the costs of Hinkley Point C nuclear plants in the GB. However, if construction costs were reduced, nuclear energy would play an essential role in meeting 'net-zero'. Second, in the high demand scenarios in 2050, even with a high construction factor of 2.5 times of maximum annual historical capacity construction rate, there will not be enough capacity to meet the demand reliably. Therefore, additional low-carbon capacities will be needed to meet the net-zero in 2050. Third, regulators may need to permit higher price caps in the energy, balancing, capacity and emission trading markets, from now onwards through 2050, to allow the marginal suppliers to recover their costs.