A Quantitative Evaluation of Capacity Remuneration Mechanisms in Europe

Abstract

With the growing penetration of zero-marginal-cost wind and solar photovoltaics leading to falling electricity wholesale prices in the energy-only market, several European countries have implemented capacity remuneration mechanisms (CRMs) in an attempt to ensure security of supply (SoS). However, the literature is far from conclusive whether CRMs are indeed a necessary and/or cost-effective way of ensuring SoS. In this study, we quantitatively compare three different market designs under different levels of wind and PV growth for the interconnected systems of Germany, France, Belgium and the Netherlands. Preliminary results show that average electricity prices decrease in markets supplemented with a CRM, as does the volatility of electricity prices. Whether or not the contribution of a CRM to SoS is worth the cost (and its possible adverse impact on energy market functioning) of implementing a CRM also remains to be evaluated.