Security of supply in decarbonized electricity systems: Optimizing capacity mechanisms under policy interventions for Austria

Abstract

This thesis investigates which combination of policy measures - consisting of a capacity mechanism and/or renewable energy support - is required to achieve a cost-efficient and decarbonized electricity system that ensures security of supply in Austria by 2040. To capture varying policy frameworks, two reference scenarios are developed: one assuming a pure energy-only market (optimistic investor), and another assuming an energy-only market with an implemented tax and anticipated price caps (pessimistic investor). In the context of the pessimistic investor scenario, the analysis examines whether a security of supply issue emerges and whether this can be addressed through increased battery deployment (battery wave), the introduction of a capacity market (CM) or a combination of a capacity market and renewable energy support in the form of a feed-in tariff (RES+CM). To address these questions, a market model with multiple optimization problems (agents) - each representing specific stakeholders in the electricity system - was developed and coupled using an Alternating Direction Method of Multipliers (ADMM) algorithm. The model's results reveal that in the case of a pessimistic investor a missing money problem arises. In a market, this problem occurs, when revenues are inadequate to cover investment and operational costs. For a pessimistic investor anticipated price caps limit revenues, leading to insufficient returns to cover the investor’s costs. This results in a security of supply problem, which cannot be resolved by increased system flexibility alone, provided by utility-scale batteries. The introduction of a capacity market solves the missing money problem, additionally removing price peaks and lowering the average prices in the energy market. Further, the capacity market without additional measures provides the most cost-efficient solution, when accounting for the economic value of lost load. Results indicate that it should be regarded as the preferred solution due to its lower complexity and reduced susceptibility to implementation errors. An acknowledged drawback of a capacity market with a central buyer is the challenge of accurately determining the amount of capacity to be procured. However, even an inefficient system design, which results in a slight over procurement of capacity market volume, does not lead to a significant increase in system costs.