Equilibrium supply security in a multinational electricity
market with renewable production
Thomas Tangerås
Research Institute of Industrial Economics
IAAE International Conference
Singapore
June 18-21, 2017
Equilibrium supply security
IAEE, June 18-21, 2017
Background
• New capacity in electricity markets primarily from variable and nondispatachble energy sources such as solar and wind
• A well-functioning market relies upon the balancing of such
intermittent production by consumption or other production
• A growing concern that large shares of renewable electricity
production endangers system reliability
• Proposed solutions: Capacity reserves and market integration
• Decisions are taken at the national level, but have consequences
abroad in multinational electricity market
• Paper develops an economic model to analyse key questions related
to supply security in a multi-national electricity markets
Equilibrium supply security
IAEE, June 18-21, 2017
Background
• Capacity reserves are not only about physical reliability
• Many markets have price triggers for the activation of reserves
EUR/MWh
Bid cap
X
Scarcity rent
Max offer
Reserve
Demand
Supply
MWh
• Supply security = Reliable supply at acceptable spot prices
Equilibrium supply security
IAEE, June 18-21, 2017
Key findings
• An increase in the capacity reserve
– allows to maintain a given level of reliability while insulating consumers
against price spikes
– distorts consumption decisions and market-based investment
• The socially optimal capacity reserve trades off those two effects
• Both effects spill over to neighboring countries under market
integration
• Equilibrium capacity reserves can be upward or downward distorted
compared to the social optimum in a mutlinational electricity market
• Which effect dominates depends on two marginal effects
– A portfolio effect creates a positive externality causing the marginal
benefit of insuring consumers to be smaller under market integration
– A cost efficiency effect of causes the marginal cost of capacity reserves
to be smaller under market integration
Equilibrium supply security
IAEE, June 18-21, 2017
Key findings
• Market integration (network investment) is downward distorted
relative to the social optimum, even if investment is centralized
• The socially optimal level of capacity reserves is smaller when
financial markets allow consumers to hedge price risk
– Energy-only market in the limit when financial markets can perfectly
hedge all risk
• Supply security targets defined and solved at the national level
increases the cost of capacity reserves and leads to inefficiently
high prices
Equilibrium supply security
IAEE, June 18-21, 2017
Conclusions and policy discussion
• The question of physical reliability is to some extent disconnected
from the issue of capacity markets
– Explicit reliability targets
– Capacity reserves determine the price effects needed to achieve a
certain reliability level
• No general predictions regarding whether countries should be
encouraged to or discouraged from increasing capacity reserves
• Investments in network reliability are downward distorted
– Congestion rents give insufficient information about marginal value
– Consumers should pay in excess of marginal valuations because
network investment reduces capacity market distortions
Equilibrium supply security
IAEE, June 18-21, 2017
Conclusions and policy discussion
• Develop liquid and well-functioning financial markets important
– Capacity reserves can be a prerequisite for establishing liquid markets
• Defining resource constraints and reliability standards and allowing
cross-border use of reserves improves resource efficiency and
increases the social value of such reserves
Equilibrium supply security
IAEE, June 18-21, 2017
QUESTIONS?