Analysis of Pricing and Volumes in Selective Capacity Markets

The requirements concerning reliability in power supply are high. This paper treats the issue of system adequacy, i.e., there should be enough installed capacity to meet the load with an acceptable reliability. The challenge in a liberalized market is that the utilization time of rarely used peak units is so low that they require extremely high prices in order to be profitable. This has led to different methods, including the creation of capacity markets. The aim of this paper is to analyze the connection between peak prices, system reliability, required amount of subsidized capacity, i.e., the volume of the capacity market. In the studied market setup, only some selected units, so-called “reserve plants”, receive a capacity payment. The paper also provides an example concerning change of capacity market volume in presence of wind power.