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Participation of Renewables in Capacity Mechanisms

written by Pradyumna Bhagwat

There are varying opinions on whether intermittent renewable generation should be allowed to participate in capacity remuneration mechanisms. From a security of supply standpoint, renewable technologies are generally considered as a cause of concern (Bhagwat, 2016). However, under certain scenarios in which the impact of intermittency is mitigated, renewables could play a role in contributing towards enhancing the security of supply (IRENA, 2017).  

The discussion on the participation of intermittent renewables in capacity mechanisms can be split based on whether the system is capacity-constrained or energy-constrained. This approach has been presented by Mastropietro, (2016).

Energy-constrained System

In an energy-constrained system, while peak demand could be served, the total energy (MWh) produced is insufficient to meet the total energy demand throughout the day/week. Examples are the hydro-dominated systems such as Brazil. In such cases, any energy that is produced by the intermittent renewable resources would lead to a reduction in the use of the hydroelectric systems thus contributing to the reliability of the system. Thus, the intermittency is of little consequence in an energy constrained system until they can achieve their expected average generation. In a nutshell, the key advantage of such a system is that there is a significant availability of flexible resources to counteract any adverse effects of RES intermittency.

Capacity-constrained System

A capacity-constrained system could be defined as a one in which there is a lack of sufficient available installed capacity (MW) to service demand at a particular point in time. In this type of a system, there are two key concerns regarding the participation of intermittent renewables in capacity mechanisms: 1) the ability to be available when needed 2) the negative impact on the economic signals. It should also be noted that a capacity-constrained system is likely to be of greater interest in the context of the European Union.

In a capacity-constrained system, the time dependence of the supply makes intermittency a crucial factor. In such a system, there is a possibility that the renewable resources may be unavailable during the period of scarcity. Thus, the “inflexibility” of these non-dispatchable resources makes it difficult to assess their actual contribution towards enhancing the security of supply.

Furthermore, the participation of renewable resources, which already receive support, in capacity markets may dampen the capacity prices and have an adverse impact on the economic signal. In this case, the capacity mechanism may not provide sufficient remuneration for existing conventional capacity to overcome the “missing money problem” or adequate incentive for new investment. Therefore, the capacity mechanism would prove to be ineffective in reaching its ultimate policy goals. One way of addressing the concern regarding artificial dampening of price signals could be by modifying the renewable support schemes to acknowledge revenue streams from capacity mechanisms (IRENA, 2017).

On the other hand, as discussed in IRENA, (2017), capacity mechanisms could be viewed not only as a policy instrument for the security of supply but also as a tool to incentivize availability of the committed resources when required. Thus, allowing RES to participate in the capacity market could provide an economic signal to the RES participants to ensure that the capacity committed is available during scarcity. The level of incentive, in this case, would also depend on the penalties set for non-performance of these resources. Another step could be the development of more sophisticated methods for predicting technology-specific de-rating factors for intermittent resources. The de-rating factor determines the fraction of the total installed capacity of a resource would be eligible for participation in the capacity mechanism. The effect of alternative definition for crediting renewables in capacity markets has been analysed in Bothwell and Hobbs, (2017).

“…EURELECTRIC recognises that properly designed capacity markets, developed in line with the objective of the IEM, are an integral part of a future market design. Conventional generation, renewable energy sources, demand response and storage should participate in energy, flexibility and capacity markets on an equal footing and should be remunerated according to their contributions to the respective markets.”

–          EURELECTRIC, (2015)

If conventional capacity and renewables have to compete on the capacity make, it should be ensured that a level playing field is provided for both types of technologies. IRENA, (2017) provides two design elements that have to be addressed and harmonised to ensure no discrimination occurs and competition is not distorted: 1) Penalties applied for underperformance 2) Methodology to calculate energy capacities. Effectively addressing these design elements would also aid in ensuring that the committed capacity is available when required.

References

Bhagwat, P.C., 2016. Security of supply during the energy transition: The role of capacity mechanisms. Delft University of Technology. doi:10.4233/uuid:9dddbede-5c19-40a9-9024-4dd8cbbe3062

Bothwell, C., Hobbs, B.F., 2017. Crediting Wind and Solar Renewables in Electricity Capacity Markets: The Effects of Alternative Definitions upon Market Efficiency. Energy J. 38.

EURELECTRIC, 2015. EURELECTRIC Contribution to a Reference Model for European Capacity Markets. Brussels.

IRENA, 2017. Adapting market design to high shares of variable renewable energy.

Mastropietro, P., 2016. Regulatory Design of Capacity Remuneration Mechanisms in Regional and Low-Carbon Electric Power Markets. Universidad Potificia Comillas. doi:10.4233/uuid:763acac3-1281-4fb5-a0ba-5ee10448017e