MARKET DESIGN AND THE COST OF CAPITAL FOR GENERATION CAPACITY INVESTMENT

11-12-2019 -  Benoît PELUCHON

Download the related pdf
Power grid Dispatching Network Hydro Plant


Keywords : Generation Adequacy; Capacity Remuneration Schemes; Electricity Market Design; Cost of Capital.


ABSTRACT
We study the impact of market design on the required rate of return asked by investors (the cost of capital) for generation capacity investments. We find that, if the Capital Asset Pricing Model applies and there is a positive correlation between electricity demand and the market return, then different generation technologies have different costs of capital at equilibrium in an Energy­Only setting. We show that peak capacity underinvestment can be explained by financial risk, even in the absence of the so­called “missing­money” problem. Analytic expressions of the equilibrium cost of capital are obtained in a simplified generation capacity expansion model. In order to respect generation adequacy standards, fixed­price contracts or capacity markets should be introduced, as was done in the UK with the Electricity Market Reform. We find that Contracts for Difference (CfDs) or capacity markets lower the equilibrium cost of capital, and thus lead to more capacity investment when perfect competitition applies, as well as to lower expected costs for consumers. As a consequence, these mechanisms should not be seen as subsidies, but as welfare improving market­design reforms. By opposition, strategic reserves are not an efficient capacity mechanism : they have no cost of capital reduction properties and only add costs to an EO design.

RETAILERS’STRATEGIES FACING DEMAND RESPONSE AND MARKETS INTERACTIONS
20-04-2020 by Cédric CLASTRES and Haikel KHALFALLAH
>> Read...

Peer-reviewed Publications

MARKET INTEGRATION AND WIND GENERATION : AN EMPIRICAL ANALYSIS OF THE IMPACT OF WIND GENERATION ON POWER PRICES CROSS-BORDER
par Sébastien PHAN and Fabien ROQUES
le 30-01-2020

DETERMINING OPTIMAL INTERCONNECTION CAPACITY ON THE BASIS OF HOURLY DEMAND AND SUPPLY FUNCTIONS OF ELECTRICITY
par Jan Horst KEPPLER and William MEUNIER
le 30-01-2020

THE VALUE OF FLEXIBILITY IN POWER MARKETS
par Stéphane GOUTTE and Philippe VASSILOPOULOS
le 30-01-2020

A PROSPECTIVE ECONOMIC ASSESSMENT OF RESIDENTIAL PV SELF-CONSUMPTION WITH BATTERIES AND ITS SYSTEMIC EFFECTS : THE FRENCH CASE IN 2030
par Hyun Jin Julie YU
le 30-01-2020

ADAPTING ELECTRICITY MARKETS TO DECARBONISATION AND SECURITY OF SUPPLY OBJECTIVES : TOWARD A HYBRID REGIME ?
par Fabien ROQUES and Dominique FINON
le 30-01-2020

CAPACITY ADEQUACY IN POWER MARKETS FACING ENERGY TRANSITION : A COMPARISON OF SCARCITY PRICING AND CAPACITY MECHANISM
par Marie PETITET, Dominique FINON and Tanguy JANSSEN
le 30-01-2020

IMPACT OF GATE CLOSURE TIME ON THE EFFICIENCY OF POWER SYSTEMS BALANCING
par PETITET et al.
le 01-04-2019

LA VALEUR ÉCONOMIQUE DU STOCKAGE DE L'ELECTRICITÉ
par Manuel VILLAVICENCIO
le 19-07-2018

HOW RENEWABLE PRODUCTION DEPRESSES ELECTRICITY PRICES: EVIDENCE FROM THE GERMAN MARKET
par Cyril MARTIN de LAGARDE et Frédéric LANTZ
le 14-05-2018

ASSESSING CROSS-BORDER INTEGRATION OF CAPACITY MECHANISMS IN COUPLED ELECTRICITY MARKETS
par Mauricio CEPEDA
le 25-04-2018

A PROSPECTIVE ECONOMIC ASSESSMENT OF RESIDENTIAL PV SELF-CONSUMPTION WITH BATTERIES AND ITS SYSTEMIC EFFECTS: THE FRENCH CASE IN 2030
par Hyun Jin Julie YU
le 09-01-2018

PRICE COMPUTATION IN ELECTRICITY AUCTIONS WITH COMPLEX RULES: AN ANALYSIS OF INVESTMENT SIGNALS
par Miguel VASQUEZ et al.
le 25-04-2017

INVESTMENT WITH INCOMPLETE MARKETS FOR RISK: THE NEED FOR LONG-TERM CONTRACTS
par Andreas EHRENMANN et al.
le 25-04-2017

TALES OF TWO ISLANDS – LESSONS FOR EU ENERGY POLICY FROM ELECTRICITY MARKET REFORMS IN BRITAIN AND IRELAND
par David NEWBERY
le 25-04-2017

RATIONALES FOR CAPACITY REMUNERATION MECHANISMS: SECURITY OF SUPPLY EXTERNALITIES AND ASYMMETRIC INVESTMENT INCENTIVES
par Jan Horst KEPPLER
le 19-04-2017

THE ROLE OF CONTINUOUS INTRADAY ELECTRICITY MARKETS: THE INTEGRATION OF LARGE-SHARE WIND POWER GENERATION IN DENMARK
par Fatih KARANFIL and Yuanjing LI
le 11-04-2017

ADAPTING ELECTRICITY MARKETS TO DECARBONISATION AND SECURITY OF SUPPLY OBJECTIVES: TOWARD A HYBRID REGIME?
par Fabien ROQUES and Dominique FINON
le 10-04-2017

SPECIAL SECTION: TOWARDS HYBRID MARKET REGIMES IN THE POWER SECTOR
par Dominique FINON, Jan Horst KEPPLER and Fabien ROQUES
le 10-04-2017

STOPPER LA DÉROUTE DES ÉLECTRICIENS EUROPÉENS : POUR UNE RÉFORME DU MARCHÉ DES QUOTAS DE CO2
par Jan Horst KEPPLER
le 20-02-2017

AN ANALYTICAL APPROACH TO ACTIVATING DEMAND ELASTICITY WITH A DEMAND RESPONSE MECHANISM
par Cédric CLASTRES and Haikel KHALFALLAH
le 10-03-2016

THE IMPACTS OF VARIABLE RENEWABLE PRODUCTION AND MARKET COUPLING ON THE CONVERGENCE OF FRENCH AND GERMAN ELECTRICITY PRICES
par Jan Horst KEPPLER, Sébastien PHAN and Yannick LE PEN
le 10-03-2016

CARBON PRICE INSTEAD OF SUPPORT SCHEMES: WIND POWER INVESTMENTS BY THE ELECTRICITY MARKET
par Marie PETITET, Dominique FINON and Tanguy JANSSEN
le 10-03-2016

LE BESOIN DE MARCHÉS DE LA FLEXIBILITÉ : L’ADAPTATION DU DESIGN DES MARCHÉS ÉLECTRIQUES AUX PRODUCTIONS D’ÉNERGIES RENOUVELABLES
par Dominique FINON
le 04-12-2015

HEDGING STRATEGIES IN ENERGY MARKETS: THE CASE OF ELECTRICITY RETAILERS
par Raphaël Homayoun BOROUMAND, Stéphane GOUTTE, Simon PORCHER and Thomas PORCHER
le 04-12-2015

ASSESSING LONG-TERM EFFECTS OF DEMAND RESPONSE POLICIES IN WHOLESALE ELECTRICITY MARKETS
par Mauricio CEPEDA and Marcelo SAGUAN
le 04-12-2015

Members Log in