Work detail

Capacity remuneration mechanisms and the optimal electricity market design

Author: Mgr. Ladislav Sobotka
Year: 2013 - summer
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Work type: Economic Theory
Masters
Language: English
Pages: 65
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Abstract: EU electricity markets are facing fundamental challenges as a result of the EU goal to increase the share
of the renewable energy sources. This policy negatively influences profitability of the conventional
producers known theoretically as “missing money” problem. As the conventional plants are crucial to
offset the variability of renewable, this policy puts the stability of the whole grid at risk in long-term
under the current electricity market design.
The thesis tests and confirms the hypothesis that there is currently a “missing money” effect on the
German energy market through a dynamic programming model. Secondly, three types of the capacity
remuneration mechanisms (CRMs) are implemented (capacity payments, strategic reserve and capacity
auction) in order to deal with “missing money” which mostly eliminates the missing money problem
depending on the setting. The most effective CRM seems be the capacity auction model as the price is
set dynamically by the market players and not arbitrarily by central regulator. The thesis further supports
the creation of the demand flexibility scheme due to the expected low costs.

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