1. IAAE International Conference Singapore June 18-21, 2017
Equilibrium supply security in a multinational electricity market with renewable production Thomas Tangerås Research Institute of Industrial Economics
IAAE International Conference
Singapore
June 18-21, 2017

2. Equilibrium supply security IAEE, June 18-21, 2017
Background
New capacity in electricity markets primarily from variable and non-dispatachble energy sources such as solar and wind
A well-functioning market relies upon the balancing of such intermittent production by consumption or other production
A growing concern that large shares of renewable electricity production endangers system reliability
Proposed solutions: Capacity reserves and market integration
Decisions are taken at the national level, but have consequences abroad in multinational electricity market
Paper develops an economic model to analyse key questions related to supply security in a multi-national electricity markets

3. Equilibrium supply security IAEE, June 18-21, 2017
Background
Capacity reserves are not only about physical reliability
Many markets have price triggers for the activation of reserves
EUR/MWh
Bid cap X
Scarcity rent
Max offer
Reserve
Demand
Supply
MWh
Supply security = Reliable supply at acceptable spot prices

4. Equilibrium supply security IAEE, June 18-21, 2017
Key findings
An increase in the capacity reserve
allows to maintain a given level of reliability while insulating consumers against price spikes
distorts consumption decisions and market-based investment
The socially optimal capacity reserve trades off those two effects
Both effects spill over to neighboring countries under market integration
Equilibrium capacity reserves can be upward or downward distorted compared to the social optimum in a mutlinational electricity market
Which effect dominates depends on two marginal effects
A portfolio effect creates a positive externality causing the marginal benefit of insuring consumers to be smaller under market integration
A cost efficiency effect of causes the marginal cost of capacity reserves to be smaller under market integration

5. Equilibrium supply security IAEE, June 18-21, 2017
Key findings
Market integration (network investment) is downward distorted relative to the social optimum, even if investment is centralized
The socially optimal level of capacity reserves is smaller when financial markets allow consumers to hedge price risk
Energy-only market in the limit when financial markets can perfectly hedge all risk
Supply security targets defined and solved at the national level increases the cost of capacity reserves and leads to inefficiently high prices

6. Equilibrium supply security IAEE, June 18-21, 2017
Conclusions and policy discussion
The question of physical reliability is to some extent disconnected from the issue of capacity markets
Explicit reliability targets
Capacity reserves determine the price effects needed to achieve a certain reliability level
No general predictions regarding whether countries should be encouraged to or discouraged from increasing capacity reserves
Investments in network reliability are downward distorted
Congestion rents give insufficient information about marginal value
Consumers should pay in excess of marginal valuations because network investment reduces capacity market distortions

7. Equilibrium supply security IAEE, June 18-21, 2017
Conclusions and policy discussion
Develop liquid and well-functioning financial markets important
Capacity reserves can be a prerequisite for establishing liquid markets
Defining resource constraints and reliability standards and allowing cross-border use of reserves improves resource efficiency and increases the social value of such reserves

8. Equilibrium supply security IAEE, June 18-21, 2017
QUESTIONS?