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Title: Capacity Payments in Restructured Markets under Low and High Penetration Levels of Renewable Energy

There is considerable debate about the degree to which restructured markets perform successfully in their use of capacity markets. In providing appropriate incentives for new and existing generation to meet reliability requirements, a variety of capacity market designs have developed across RTOs and ISOs in the United States and internationally. Growing levels of variable renewable energy (VRE) resources arguably create new challenges for capacity market designs, because VREs suppress energy prices while providing relatively little capacity, with these effects increase with VRE penetration. The purpose of this report is threefold. First, we provide a brief outline of the purpose and design of various capacity markets under consideration using variable resource requirement (VRR) demand curves. Second, we discuss some of the main challenges raised in existing literature and a set of interviews that we conducted with market participants, regulators, and observers, including where there substantive differences in opinion. Third, we consider some of the challenges that may be specific to higher penetration levels of VRE. While the well known 'merit order' effect from VRE can be expected to suppress wholesale energy prices and revenue, this may be partly mitigated by increased capacity payments and the greater importance of AS payments formore » flexible capacity. The potential for greater reliance on capacity markets for generator revenues may amplify any inefficiency and costs associated with capacity price volatility and other suboptimal market design choices. Regulatory intervention to ensure adequate capacity payments and ancillary service revenue may become more prevalent under current market designs as the timescale for market signals shifts increasingly from near term (e.g., day-ahead in wholesale electricity markets) to longer term (annual intervals in capacity markets). Our review and discussion with market participants suggest substantive challenges may remain in implementing capacity markets that provide both adequate operational and investment incentives, particularly under high-VRE scenarios with greater need for flexible capacity.« less
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  1. National Renewable Energy Lab. (NREL), Golden, CO (United States)
Publication Date:
OSTI Identifier:
Report Number(s):
DOE Contract Number:
Resource Type:
Technical Report
Research Org:
NREL (National Renewable Energy Laboratory (NREL), Golden, CO (United States))
Sponsoring Org:
USDOE Office of Energy Efficiency and Renewable Energy (EERE), Solar Energy Technologies Office (EE-4S); Office of Strategic Programs
Country of Publication:
United States
14 SOLAR ENERGY; 29 ENERGY PLANNING, POLICY, AND ECONOMY markets; capacity markets; market design; variable renewable energy; penetration levels; restructured; capacity; reliability