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Market Design Considerations for Scarcity Pricing: A Stochastic Equilibrium Framework

Anthony Papavasiliou, Yves Smeers, and Gauthier de Maere d'Aertrycke

Year: 2021
Volume: Volume 42
Number: Number 5
DOI: 10.5547/01956574.42.5.apap
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Abstract:
Scarcity pricing is a mechanism for improving the valuation of reserve capacity in real-time electricity markets. The goal of scarcity pricing is to mitigate the missing money problem and enhance investment in flexible resources. The implementation of scarcity pricing is underway in a number of U.S. markets, including Texas and PJM. The implementation is also currently under consideration in Belgium. As the mechanism was originally conceived in the context of a U.S.-style two-settlement system, its implementation in a European setting poses a number of interesting market design dilemmas which can affect the back-propagation of scarcity prices to forward day-ahead markets for energy and reserve capacity. We propose a modeling framework for analyzing these market design choices based on stochastic equilibrium, and use this modeling framework in order to represent and analyze a wide range of market design proposals. We report results on a case study of the Belgian electricity market.



The Impact of Capacity Market Auctions on Wholesale Electricity Prices

Francisco Moraiz and Dominic Scott

Year: 2022
Volume: Volume 43
Number: Number 1
DOI: 10.5547/01956574.43.1.fmor
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Abstract:
The objective of this analysis is to shed light on the impact-on electricity prices and net costs borne by the consumer-of the introduction of the Capacity Market. The analysis uses the 'surprise' announcement of the introduction of a Capacity Market Early Auction to assess its impact on wholesale prices using the 'difference-in-differences' (did) method. Although we cannot exclude entirely the possibility of other drivers, our results suggest that the announcement of introduction of the Early Auction may have reduced the spread between peak and base prices by £0.84/MWh. This may be consistent with a reduction in wholesale revenues of about half the total value of the Capacity Market of £380 million. Our research is subject to a number of assumptions and accompanying caveats which we spell out.





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