Capacity markets vs. “energy only” markets with improved scarcity pricing under increasing wind penetration

We develop three-stage equilibrium models to compare a capacity market design and an “energy only” market design with improved scarcity pricing under wind penetration levels ranging from 10% to 50%. The first model represents optimal generation capacity investment and bidding decisions of power generators in a capacity market stage, followed by hourly dispatch decisions in a two-stage energy market. In the second model, power generators make capacity investment decisions and then participate in an “energy only” market with real-time operating reserve demand curves where they can earn additional revenues through reserve provision. Both models are run on the same test system under uncertainty, and are compared to a benchmark identifying the least-cost portfolio of new generation capacity investments to meet the reserve requirements of the capacity market design. We find that, under all wind penetration levels, the capacity market design tends to yield higher investment in peaking units and higher consumer costs than the “energy only” market design, while maintaining the same loss of load expectation. When investment decisions account for low-probability, high-net load system conditions, and under transmission congestion, investment levels are more similar, but the capacity market design experiences more energy scarcity hours due to lower investment from peak generators located on a congested part of the network. Both market designs may lead to revenue insufficiency, particularly under transmission congestion and high wind penetration levels. Our findings highlight the importance of quantitative analysis within a unified modeling framework for comparison of electricity market designs under high renewable penetration.