The generation mix, price caps and capacity payments
(2015) EU Energy Capacity Mechanisms — ISBN: [9780198749257], published
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- Abstract
- This chapter provides a simplified economic analysis of a capacity mechanism that is used to correct the investment incentives when wholesale prices are capped. The price cap reduces revenue for investors, which reduces their investments incentives. A capacity mechanism can restore those investment incentives. A graphical analysis of optimal generation portfolios, by means of load duration graphs and levelised cost functions shows that a price cap affects investments in peak-load technologies and leaves investments in other technologies unchanged. However, to correct for the price cap, the capacity mechanism must provide a subsidy for all technologies, from both peak to base load. Only providing a subsidy for peak load technology would distort the relative costs of the different technologies, and lead to an inefficient generation portfolio. The chapter continues with a discussion on the effects of intermittent generation and demand flexibility.
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Willems, B. (2015). The generation mix, price caps and capacity payments. In L. Hancher, A. de Hauteclocque, M. Sadowska (ed.), EU Energy Capacity Mechanisms (First Edition). Oxford University Press. https://hdl.handle.net/2078.5/255983