April 25, 2017
Crediting Renewables in Electricity Capacity Markets:
The Effects of Alternative Definitions upon Market Efficiency
Benjamin F. Hobbs, John Hopkins University
As the penetration of intermittent renewable energy in electricity markets grows, there is increasing need for capacity markets to account for the contribution of renewables to system adequacy. An important issue is the definition of capacity credits for resources whose availability may be limited. Inconsistencies in capacity counting methods used by system operators motivate this investigation into the market efficiency of renewable capacity credits. Inaccurate credits can distort investment between renewables and nonrenewables, and among different types and locations of renewables. We quantify the resulting loss of efficiency, which in simulations based on Texas (ERCOT) data increases total system generation costs by up to 0.5%. The inefficiency is much larger for more ambitious renewable portfolio standards. A least-cost capacity market design should reward marginal capacity contributions by different resources considering how renewable penetration affects the timing of load peaks, net of renewable contributions.
In deriving these results, the equivalence between certain optimization problems and market equilibria under alternative market designs is shown, as is the ability of a capacity market to correct the market failure due to price caps and yield the socially efficient solution. (with Cynthia Bothwell)