do capacity support schemes work? an empirical assessment across oecd countries iefe seminar –...

Do capacity support schemes work? An empirical assessment across OECD

countries

IEFE Seminar – November 23, 2012

Simona Benedettini*, Giuseppe Buglione, Guido Cervigni*

* IEFE Center – Bocconi University

KPMG, London

Economics of capacity mechanisms

Motivations for the research

Empirical strategy

Results

Conclusions

Outline

Capacity mechanisms may be defined as regulatory means aimed at ensuring resource adequacy to guarantee the reliable provision of electricity

Design of capacity mechanisms

Price mechanisms

Capacity payment

Quantity mechanisms

Strategic reserveCapacity market

Economics of capacity mechanismsWhat are capacity mechanisms?

UK (1990 – 2000)

Elegible capacity: each generator available to operate in each half hour

The formula: LOLP x(VOLL – SMP/BP)

Capacity payment range: 10-50 £/MWh

Capacity paymentsSome examples (1)

Strategic witholding to increase LOLP

Spain (1998 - 2006)

Elegible capacity: generating units that had run 480 hours at full capacity in the previous year (previous five years for hydroelectric plants)

The formula: Availability Coeff. x Installed Capacity

Capacity payment range: 7.8€/MWh – 4.8 €/MWh


Too simpleInefficient incentive to participate in the pool

Spain (2007 - present)Short term incentive: availability of existing capacity

β x Availability Coefficientj x Installed Capacityi

β = 5,150 € AC = 0.912 for carbon ; 0.913 for CCGT

Long term incentive: new capacity (for 10 years)

28,000 €/MW if Reserve Margin < 1.1 (93,000 – 150,000) x Reserve Margin if RM ≥ 1.1


Public consultation for a new capacity support scheme


Italy (2004 – present)

Elegible capacity: plants available during high-critical and mid-critical days during the year (intermittent sources are excluded)

Two components: capacity remuneration component:

β x (GCAP/MW ) x Conversion factor F

additional component equals to the difference (if positive) between:

the revenues in the “critical” days that the plant would have obtained on the basis of the administrated tariff

the revenues in the “critical” days that the plant would have obtained by valorizing the energy in each hour to the maximum between the power exchange price and the 80% of the administrated tariff

Capacity obligations 2007 – present: PJM’s Reliability Pricing Model

Centralized market based on auctions UCAP to be delivered as far as three years in advance Base and adjustment auctions Payment: cleared price x the delivered capacity Penalties in case of lack of delivery Cleared price for 2014/2015: 125.99$ Auctioned capacity for 2014/2015: 135,000 MW

44,000 MW (CCGT) 42,000 MW (Coal)

Quantity mechanismsSome examples (1)


Reliability options 2006-present: Colombia Firm Energy Obligations

Centralized market based on descending auctions Reliable capacity to be delivered as far as three years in

advance Payment: cleared price x the delivered capacity.

In exchange of this payment:

The SO may exercise the option if scarcity occur:

VOLL > strike price

The generator pays the SO: the VOLL - strike price


Capacity credits Since 2005 in Western Australia 1999-2006 United States

Decentralized market LSE uses capacity credits, sold by generators, to meet its

capacity obligations One capacity credit = 1 MW of UCAP US: daily, multi-daily, monthly, and multi-monthly market Western Australia: yearly market


Strategic reserve Finland (2006), Norway (2000), Sweden (2003)

Generating units called upon to supply energy when a scarcity scenario appears

The SO defines the rules for offering the electricity of these reserves on the market

Risk of distortion of price signals

Absence of demand response

Missing money problem

Market power

Coordination failure

Price volatility

Economics of capacity mechanismsMotivations for capacity mechanisms

DP

BaseloadMC

MW

PeakloadMC

DP

BaseloadMC

MW

PeakloadMC

DP

BaseloadMC

MW

PeakloadMC

Belgium France Germany Italy Spain The Netherlands0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

45.00%

50.00%

11.17%

17.55%

24.27% 24.84%

32.79%

22.14%21.64%

25.64%

45.35%

31.88%

47.47%

33.42%

Generation from RES (% of the total gross electricity generation)

2015 2020 2025 2030

Motivations for the researchIncrease in generation from RES (1)

Motivations for the researchIncrease in generation from RES (2)

… increases price volatility

… tends to reduce market price level

… worsen the utilization of conventional capacity

Resource adequacy becomes an issue …

Investment in conventional capacity becomes less attractive

Motivations for the researchResource adequacy is an issue …

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2013 2015 20200.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

Belgium France Germany Italy Spain The Netherlands

Res

erve

mar

gin

Source: National TSOs, and ENTSOE – SAF 2010 – 2015.

Motivations for the researchRevived interest in Europe

France: capacity obligations by 2015-2016

Germany: under discussion the adoption of a capacity support scheme

UK: DECC Consultation on Possible Models for a Capacity Mechanisms concluded with the adoption by 2015 of a capacity mechanism based on capacity obligations

Italy: first auctions of the new capacity mechanism based on reliability options will be held in 2013

First attempt to empirically asses the impact of different types of capacity mechanisms on resource adequacy

Theoretical models and simulation on capacity mechanisms e.g.: Rodilla et al. (2011), Hasani and Hosseini (2011), Cepeda and

Finon (2011), Roques (2008) Discussion of the effectiveness of different country - capacity mechanisms

e.g.: Park et al. (2007), Rodilla and Batlle (2012), Batlle 2008, Brattle Group (2009), Vasquez et al. (2003), Cramton and Stoft (2007), Federico and Vives (2008), Harbord and Pagnozzi (2008)

Qualitative comparison of the characteristics of different mechanisms e.g: Batlle and Pérez-Arriaga (2008), Batlle and Rodilla (2010), Pérez –

Arriaga (2001), Haikel (2011), Stoddard and Adamson (2009) Liberalizaton and resource adequacy

e.g.: Nagayama (2010), Steiner (2000), Zhang (2008)

Motivations for the researchContribution of the paper

22 OECD high – income countries, over the period 1985 – 2010

Capacity mechanisms in place Capacity payment: GR (since 2006), HU (since

1992), IE (since 2005), IT (since 2004), ES (since 1997), PT (since 2010), UK (1990 - 2001)

Strategic reserve: FI (since 2006), SE (since 2003), NW(since 2000), NL (since 2006), NZ (since 2005)

Capacity market: AU (since 2005, WAU), US (since 1999)

Empirical AnalysisThe Sample

Empirical AnalysisModel and methodology

𝑌 𝑖𝑡=𝐶𝑀 𝑖𝑡+𝜕𝐶𝑃 𝑖𝑡+𝜗𝑆𝑅𝑖𝑡+𝑌 𝑖𝑡 −1+𝜃 𝑋 𝑖𝑡+𝜇𝑖𝑡+𝜖 𝑖𝑡

𝑌 𝑖𝑡=𝐶𝑀 𝑖𝑡+𝜕𝐶𝑃 𝑖𝑡+𝜗𝑆𝑅𝑖𝑡+𝑌 𝑖𝑡 −1+𝜃 𝑋 𝑖𝑡+𝜋 𝑍 𝑖𝑡− 1+𝜇𝑖𝑡+𝜖 𝑖𝑡

Estimator: Difference GMM

Robustness checks

Xit: Perc of Res Capit, Elec Consit, GDP per capitait, Private Credit/GDPit, EU

Zit: Compit-1, Vertical Integrationit-1,Independent Regulatory Agency

Empirical AnalysisResults (1)

Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7

Existence of a capacity marketit 0.023** 0.023* 0.023*** 0.024** 0.023** 0.024** 0.023**

(0.01) (0.01) (0.01) (0.01) (0.01) (0.01) (0.01)Existence of a capacity paymentit 0.000 -0.000 -0.002 -0.001 -0.002 -0.002 -0.002

(0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00)Existence of a strategic reserveit 0.000 0.000 0.000 -0.000 0.000 0.000 0.000

(0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00)Renewable installed capacityit 0.034 0.047 0.008 0.006 0.003 0.006 0.004

(0.04) (0.04) (0.03) (0.03) (0.03) (0.03) (0.03)Electricity Consumptionit -0.002*** -0.002*** -0.003*** -0.003** -0.003*** -0.003*** -0.003***

(0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00)GDP per capitait 0.000 0.000 0.000 0.001 0.000 0.000 0.000

(0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00)Credit to private sectorit 0.007 0.004 0.002 0.003 0.003 0.003 0.003

(0.01) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00)European Union -0.001 -0.001 -0.004 -0.002 -0.001 -0.001 -0.002

(0.00) (0.00) (0.01) (0.00) (0.00) (0.00) (0.00)Reserve Marginit-1 0.539*** 0.535*** 0.400*** 0.417*** 0.416*** 0.398*** 0.411***

(0.01) (0.01) (0.02) (0.01) (0.01) (0.02) (0.01)Presence of IRAit 0.000 -0.001

(0.00) (0.00)Entry regulation it-1 -0.009 -0.006

(0.01) (0.01)Vertical Integration it-1 -0.004 -0.002

(0.00) (0.00)Public Ownership it-1 -0.003 -0.002 -0.004

(0.00) (0.00) (0.00)Obs. 494 494 458 458 458 458 458Hansan test (p-value) 0.905 0.847 0.720 0.731 0.788 0.861 0.795

Arellano – Bond (1) (p-value) 0.307 0.307 0.306 0.307 0.302 0.308 0.305


Conclusions

Effects of different type of capacity mechanisms on resource adequacy

Capacity markets are more effective in ensuring resource adequacy

Long-term oriented Coordination of new entry Penalties for lack of commmitment Lower regulatory uncertainty

Back-up slides

Robustness checks (1)


Existence of a capacity marketit 0.023** 0.023* 0.023** 0.026* 0.022* 0.015 0.026**

(0.01) (0.01) (0.01) (0.01) (0.01) (0.01) (0.01)Existence of a capacity paymentit 0.000 -0.000 0.000 0.000 0.000 0.001 0.000

(0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00)Existence of a strategic reserveit 0.000 0.000 0.001 0.001 0.001 0.001 0.001

(0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00)Renewable installed capacityit 0.034 0.047 0.034 0.070* 0.038 0.028 0.039

(0.04) (0.04) (0.03) (0.04) (0.02) (0.02) (0.02)Electricity Consumptionit -0.002*** -0.002*** -0.003*** -0.002** -0.003** -0.003** -0.003***

(0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00)GDP per capitait 0.000 0.000 -0.000 0.000 0.000 -0.000 0.000


(0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00)European Union -0.001 -0.001 -0.003 -0.002 -0.002 -0.002 -0.002


(0.01) (0.01) (0.03) (0.01) (0.03) (0.04) (0.02)Presence of IRAit 0.000 0.001

(0.00) (0.00)Entry regulation it-2 -0.016 -0.012

(0.02) (0.02)Vertical Integration it-2 -0.006 0.003

(0.01) (0.00)Public Ownership it-2 -0.006 -0.005 -0.006

(0.01) (0.01) (0.01)Obs. 494 494 458 458 458 458 458Hansan test (p-value) 0.905 0.847 0.727 0.636 0.866 0.766 0.784Arellano – Bond (1) (p-value) 0.307 0.307 0.303 0.308 0.304 0.301 0.309


Robustness checks (2)


Existence of a capacity marketit 0.023** 0.023* 0.026** 0.029** 0.028* 0.027** 0.030*(0.01) (0.01) (0.01) (0.01) (0.01) (0.01) (0.02)

Existence of a capacity paymentit 0.000 -0.000 -0.000 -0.001 -0.001 -0.001 -0.001

(0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00)Existence of a strategic reserveit 0.000 0.000 0.002 -0.000 0.000 0.001 0.000

(0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00)Renewable installed capacityit 0.034 0.047 0.032 0.024 0.033 0.026 0.027

(0.04) (0.04) (0.03) (0.03) (0.03) (0.02) (0.03)Electricity Consumptionit -0.002*** -0.002*** -0.004*** -0.003** -0.003** -0.004** -0.003**

(0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00)GDP per capitait 0.000 0.000 -0.000 0.000 0.000 -0.000 0.000


(0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00)European Union -0.001 -0.001 -0.003 -0.001 -0.001 -0.002 -0.001


(0.01) (0.01) (0.02) (0.01) (0.01) (0.02) (0.02)0.000 0.001

Presence of IRAit (0.00) (0.00)-0.021 -0.019

Entry regulation it-3 (0.02) (0.02)-0.001 -0.001

Vertical Integration it-3 (0.00) (0.00)-0.002 -0.001 -0.002

Public Ownership it-3 (0.00) (0.00) (0.00)Obs. 494 494 454 454 454 454 454Hansan test (p-value) 0.905 0.847 0.578 0.953 0.876 0.658 0.877Arellano – Bond (1) (p-value) 0.307 0.307 0.305 0.307 0.305 0.306 0.304Arellano – Bond (2) (p-value) 0.571 0.548 0.834 0.982 0.812 0.814 0.943

do capacity support schemes work? an empirical assessment across oecd countries iefe seminar –...

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