Implementing capacity subscription in the Dutch electricity market

Abstract

The production of renewable energy is steadily going up, and as a result of the (almost) zero-marginal cost renewables, the marginal cost based electricity prices go down. While the need for backup generation increases due to the fluctuating availability of renewable energy, the generation units that supply electricity during demand peaks see their income per year drop. This trend could continue to a point where they are mothballed or shut down. As a result, different forms of capacity mechanisms are implemented all over the world, to prevent an increasing amount of blackouts. A capacity subscription market is a capacity mechanism in which consumers make monthly payments, related to the peak demand they want to consume during hours of shortage. Compared to other capacity remuneration mechanisms, this market has the advantage that consumers can choose and pay for their own security of supply. However, a capacity subscription market has not been implemented, and there has been limited scientific research into it. This study aims to give insight into the impact of implementation of a capacity subscription market.
By means of an hourly dispatch model, plant profitability of all electricity generation plants in the Netherlands was estimated. Eight scenarios were used to determine the impact of capacity subscription, variating on the amount of renewable energy production as a result of the weather and the availability of interconnection. The impact of capacity subscription on reliability is positive, meaning there are less hours in a year where the amount of electricity supply is insufficient, and the total amount of unserved energy is lower. The results show that the price for capacity subscription would be around 5-30 €/kW/year. The price per year is dependent on the under- or overinvestment at that time. Because consumers can determine their own security of supply, the risk of underinvestment, black-outs, and thus peak prices is dependent on the risk taking behavior of consumers. While the total long term effect on affordability is unclear, the market is expected to become more efficient, as more demand response decreases the need for back-up generation. The implementation would reward consumer flexibility of consumption and could improve local congestion management. Therefore, a capacity subscription market is considered suitable to accommodate reliability in a 100% renewable market. However, if capacity subscription would be applied just in the Netherlands, the effect could leak away to neighboring countries. If there are shortages in countries with a high interconnection with the Netherlands, this could result in peak prices regardless of a capacity subscription market. It is therefore advised that either this market should be implemented in all coupled European electricity markets or other measures are taken to prevent peak prices caused by neighboring countries. Further research should look into design measures that could prevent this leaking effect.