Model-based analysis of the impact of effective competition on supply security in energy market

Abstract

This paper analyzes the impact of effective competition on the supply security problem in the German electricity market. Based on the energy-only resource adequacy mechanism utilized in ERCOT, effective competition is defined by two major elements. The first element is active demand-side participation in the market and the second one is defining optimal price cap in the market to achieve efficient scarcity prices. Then, a dynamic model is proposed and different scenarios of effective competition are applied to two different market designs; energy-only market and energy market with capacity payments. Results show that increasing the price cap to approach to the Value of Lost Load (VOLL) and higher levels of demand-side participation in the market reduce the risk of generation inadequacy and mitigate the supply security problem in the investigated electricity market. Also, utilizing effective competition in energy markets with capacity payment mechanism triggers more investment in comparison with energy-only markets.