Testing Alternative Electricity Market Design Performances: Methodology and Case Study

Abstract

Wholesale market design choices continue to be debated after four decades, especially as they are being scrutinized in light of the decarbonization goals. This paper shows how a Nash-Cournot equilibrium model can combine capacity, energy, and ancillary services. The model integrates multi-year capacity expansion with dispatch decisions to capture the gaming behavior of generators in the long term, including entry and short-term capacity withdrawal decisions with and without carbon constraints. The model is deployed for Georgia, a hydro-dominated system in Eastern Europe where a new market will be introduced in 2024. The modeling analysis examines how alternative design options perform to support the country's power sector decarbonization. The results show that, in such a system, the proposed energy-only (EO) marke design performs well, yielding the lowest prices without exacerbating volatility both with and without emission constraints. Although the EO design brings in less capacity, leading to higher expected unserved energy (EUE), it does not breach the incumbent reliability standard, albeit we show that it does expose the system to power shortage in extreme low hydro availability scenarios. On the contrary, the options with a capacity market may lead to significant excess capacity, albeit curbing price volatility as well as EUE. While these findings are specific to Georgia, the modeling framework can be deployed in other systems/countries to evaluate market design proposalst.