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2018-06-08 | Peer Reviewed

Uncertainty and the long-term adequacy of supply: Simulations of capacity mechanisms in electricity markets

Lara-Arango, David, Santiago Arango Aramburo and Erik R Larsen. 2017. “Uncertainty and the long-term adequacy of supply: Simulations of capacity mechanisms in electricity markets.” Energy Strategy Reviews 18: 199-211.
Download reference Doi:https://doi.org/10.1016/j.esr.2017.10.002

Deregulation in electricity markets has changed the conditions for maintaining long-term adequacy of supply. Particularly in the last decade, security of supply has become a major issue for policymakers due to a number of changes in technology, especially the introduction of renewables, where regulators have introduced capacity mechanisms. In this paper, we focus on the use of two different capacity mechanisms: procurement for long-term strategic reserves contracting, and centralized auctioning for capacity contracts. We investigate the effect of uncertainty on the effectiveness of these two mechanisms in maintaining a stable and sufficient supply of capacity. We use simulation to establish the behavior as the level of uncertainty is increased. Our results suggest that a market's level of uncertainty plays an important role in the effectiveness of these two interventions. The results raise questions about when it is appropriate to introduce either of them.