A Capacity Adequacy Mechanism Based on Optional Option and Its Impact on Generation Mix Equilibrium

Abstract: Due to the missing money problem, it is a challenging task to maintain generation capacity adequacy with increasing shares of zero-marginal-cost renewable energy resources. Multiple capacity adequacy mechanisms (CAMs), such as scarcity pricing, capacity payment, capacity market, and reliability option, have been proposed and implemented, each having its own pros and cons. Here, we propose a hybrid CAM called optional option. The hybrid CAM allows scarcity pricing and reliability option to co-exist. Market participants, with diverse degrees of risk aversion and diverse forecasts of future duration of scarcity, can self-select the CAM best suited to themselves. We also present a method to efficiently derive the generation mix equilibrium under the CAM, by using the theory that the profits of all generator types approach zero in the long-term equilibrium. Simulation results show that the proposed CAM enables Pareto improvement by letting market participants be better off than being restricted to only one CAM. The results also show the effectiveness of the algorithm to calculate the generation mix equilibrium.