Beyond the borders of electricity

Abstract

Within electricity markets, serious concerns exist whether a competitive electricity market will provide the necessary incentives for investment in generation. In Europe several countries are looking at the options of implementing a capacity mechanism. A capacity market provides a possible solution to this problem of generation adequacy but the effectiveness of different methods is disputable and one-to-one comparison is nearly impossible. With Germany deciding on the implementation of a capacity market, concerns arise regarding the cross border effects on the Dutch market. The main research question that stressed the problem is formulated as: “To what extent does the implementation of a capacity market in Germany influence the performance of the Dutch electricity market?” Answer to this research question can help policy makers in assessing policy decision in the electricity market including cross border effects. From literature, several performance indicators are derived. A combination including both system indicators as well as the policy goals reliable, sustainable and affordable are used. The starting point for the modelling part of this research is the Power2Sim electricity market model. In order to be able to answer the research question, the Power2Sim model needs to be extended with two modules. An investment module and a capacity market module. The two modules are modelled in excel and a Visual Basic script is developed to create interaction between the three modules. The data used as input for the model consist of a wide range of reports and empirical data. The results of the model show that the introduction of a capacity market in Germany has an effect on the performance of the Dutch electricity sector. The main finding is that a capacity market leads to higher investments in the country it is implemented. The cross border effects include improvements in expected loss of load hours, total consumer costs and CO2 emission. These effects are enlarged with the expanding of the interconnection capacity between Germany and the Netherlands. CO2 price sensitivity was taken into account as well resulting in some interesting observations regarding interaction between a capacity market and CO2 prices. Following the interpretation of the results, several recommendations have been proposed. The recommendations depend on the view of the policy makers. The three indicators reliability, affordability and sustainability include trade-off. Consequently, policy makers need to decide on which indicator to give preference. A general decision to be made for policy makers is whether they value an independent electricity sector more than the free rider benefits of being dependent on German capacity. Every study is subjected to some kind of limitations. For this study, the limitations can be found in the number of scenarios that have been ran, the number of countries that have been analysed in detail and the basic way of evaluating investment. Concluding, this study has led to several contributions. This study shows that the Power2Sim model can be extended to fit capacity mechanisms. This can be valuable for policy makers in the electricity market in evaluating decision considering the implementation or consequences of a neighbouring capacity mechanisms. Secondly this study has contributed to the validation of existing studies that measure the effect of a capacity market. It furthermore extended the existing research by adding specific cross border effects for the Netherlands under various conditions. At last the research provides directions for future research on the issues that either cannot be explained or could not be fit in the current model structure.