Impact of capacity mechanisms and demand elasticity on generation adequacy with risk-averse generation companies

• Published in: Electric power systems research 2021-10, Vol.199, p.107369, Article 107369
• Main Authors: Kaminski, Steffen, Höschle, Hanspeter, Delarue, Erik
• Format: Article
• Language: English
• Subjects: Adequacy; Alternating direction method of multipliers; Capacity markets; Demand; Elastic demand; Elasticity; Electric power demand; Electricity generation; Impact analysis; Market equilibrium; Power system economics; Risk
• ISSN: 0378-7796; 1873-2046
• DOI: 10.1016/j.epsr.2021.107369

•Model formulation of a stochastic non-cooperative capacity planning problem.•Short-term elastic energy demand, risk-averse investors, a capacity market.•Capacity market can be used to hedge against the negative effects of risk aversion.•Capacity market can mitigate welfare transfer to risk-averse investors. While on-going and future developments will likely increase the short-term elasticity of the electricity demand, capacity markets are often put forward as a possible remedy to ensure generation adequacy. In this paper, we provide a model formulation of a stochastic non-cooperative capacity planning problem reflecting short-term elastic energy demand, risk-averse investors, and a capacity market. The Conditional-Value-At-Risk is used as a coherent risk-measure. For solving the model, we deploy an Alternating Direction Method of Multipliers. We analyze the impact of short-term demand elasticity on the social welfare, agents’ surpluses, and Loss-of-Load-Expectation of an energy-only market and a market complemented by a capacity market. Moreover, we consider the impact of set capacity targets. For the energy-only market, we show that short-term demand elasticity even amplifies the negative effect of risk aversion on social welfare. A capacity market can be used to hedge against the negative effects of risk aversion, even if the capacity target is not set ideally. Furthermore, we show that a capacity market can be used to mitigate welfare transfer to investors and lower the loss-of-load-expectation induced by scarcity times.