Strategic behaviour in a capacity market? The new Irish electricity market design
International Association for Energy Economics
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Ritz, R., & Teirila, J. (2019). Strategic behaviour in a capacity market? The new Irish electricity market design. Energy Journal, 40 (1. 3305) https://doi.org/10.5547/01956574.40.SI1.jtei
The transition to a low-carbon power system requires growing the share of generation from (intermittent) renewables while ensuring security of supply. Policymakers and economists increasingly see a capacity mechanism as a way to deal with this challenge. Yet this raises new concerns about the exercise of market power by large players via the capacity auction. We present a new modelling approach that captures such strategic behaviour together with a set of ex ante empirical estimates for the new Irish electricity market design (I-SEM) in which a single firm controls 44% of generation capacity (excluding wind). We find significant costs of strategic behaviour, even with new entry: In our baseline scenarios, procurement costs in the capacity auction are around 150-400 million EUR (or 40-100%) above the competitive least-cost solution. From a policy perspective, we also examine how market power can be measured and mitigated through auction design.
This study is funded by the Fortum Foundation and the Strategic Research Council, Finland, Project No. 292854.
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External DOI: https://doi.org/10.5547/01956574.40.SI1.jtei
This record's URL: https://www.repository.cam.ac.uk/handle/1810/288011