Capacity remuneration mechanisms for power systems in transition

Abstract

During the energy transition, investors in power plants and storage systems will face increasing risks due to higher uncertainties regarding new technologies, electrification, and, most recently, an increasingly weather-dependent power production. Over the past years, capacity remuneration mechanisms (CRMs) have been introduced in more European Member States and have evolved from temporary to permanent solutions to ensure resource adequacy. In this study, we analyze the effects of introducing three CRMs, a strategic reserve (SR), a capacity market, and capacity subscription (CS), under different scenarios with varying CO 2 limits on eligible technologies during the transition of a power system based in the Netherlands. We apply a co-simulation of two agent-based models. We find that a SR can effectively reduce involuntary load shedding during the energy transition, but at the cost of high and volatile wholesale prices. As an alternative, CS can incentivize demand-side response from all consumers; however, it requires guidance to prevent investment cycles. Furthermore, along our modeled transition pathway, we found that weather can have a higher impact on CO 2 emissions than the market design. However, we recommend carefully implementing CO 2 limits on eligible technologies for CRMs to ensure their effectiveness.