Capacity remuneration mechanisms for decarbonized power systems

Motivated by generation system adequacy concerns, many European countries have introduced capacity remuneration mechanisms (CRMs) to ensure sufficient investments in power generation. However, it is uncertain whether the existing CRMs will promote sufficient adequacy and flexibility in a decarbonized power system, where supply and demand will become more weather-dependent. We assess the effectiveness of a centralized capacity market, a strategic reserve, and a decentralized capacity market via capacity subscriptions in a climate-neutral, weather-driven power system. We develop a co-simulation of two agent-based models simulating myopia in both operational and investment decisions. We simulate weather uncertainty by running the model with 40 different weather years. Our results from a case study based on the Netherlands indicate that a strategic reserve may increase electricity price volatility in the long-term. A centralized capacity market is more cost-effective than a strategic reserve, but administratively setting its parameters is prone to over- or underprocurement. Capacity subscription allows consumers to select their desired level of reliability. Results indicate that these decentralized capacity markets may yield a clearer signal for the needed dispatchable capacity and promote demand-side response, but it may be challenging to provide long-term certainty for investors. • In a system with high renewable energy and high flexibility, the use of a strategic reserve may increase the volatility of electricity prices. It will also be difficult to parametrize. • With a capacity market, the parametrization of the demand curve and the derating factors also become more challenging in a system with more renewable energy and flexibility. • A capacity subscription reveals the consumers’ need for capacity during scarcity periods. However, the short contract duration may lead to investment cycles or to under investments if consumers do not consider the risk of extreme weather events.