Capacity Market Design and Theory

Abstract: Most modern electricity markets do not guarantee that generation is reliable and sufficient to provide all consumer’s electricity needs at all times. This is due to design-flaws and regulatory intervention. During the coming decades, increased electricity demand and decarbonization trends will affect the electricity market greatly. As the share of wind and solar power increases in the generation mix, the inertia in the power system is expected to decrease. This can potentially increase the systems exposure to blackout risk. Therefore, it is important to ensure that electricity is traded in a way that ensures enough supply even during scarcity events. The study aims to compare six different capacity market designs that are widely discussed in the scientific literature. Furthermore, this study uses MATLAB to simulate how the utility for the strategic reserve in Sweden has changed over the past few years. The study finds no ideal capacity market design but concludes that different solutions come with their own advantages and trade-offs. The simulation results show that the utility of the strategic reserve in Sweden has increased during the last few years. Additionally, the simulation results suggest that demand for the strategic result varies on a daily time frame.