An analysis of shortage pricing and capacity remuneration mechanisms on the pan-European common energy market

• Published in: Energy policy 2023-12, Vol.183, p.113843, Article 113843
• Main Authors: Mou, Yuting, Papavasiliou, Anthony, Hartz, Katharina, Dusolt, Alexander, Redl, Christian
• Format: Article
• Language: English
• Subjects: Capacity market; Energy transition; Energy-only market; Operating reserve demand curve; Renewable integration; Shortage pricing
• ISSN: 0301-4215; 1873-6777
• DOI: 10.1016/j.enpol.2023.113843

Various market design options have been implemented or proposed in order to address the missing money problem and facilitate the energy transition. In order to analyze the performance of energy-only markets, and energy markets supplemented by shortage pricing and/or capacity remuneration mechanisms, we develop a capacity expansion model for the European system. A number of market design scenarios are simulated until the year 2050. We consider a range of sensitivity analyses so as to understand the effect of various market design options on the performance of energy markets and their variants, as well as the effects of cross-border coordination. The findings of this paper indicate that capacity remuneration mechanisms are sensitive to numerous non-obvious design parameters and can sometimes lead to over-dimensioning, even if the effect on total cost can be less pronounced, whereas shortage pricing appears as a no-regret measure because price adders recede when there is abundant flexibility in the system. •A generation capacity expansion model is developed.•The ideal energy-only market can support the energy transition.•CRMs are sensitive to design parameters, and EU-wide coordination can be valuable.•Shortage pricing via ORDCs appears as a no-regret measure.