Ensuring security of electricity supply: How capacity obligation impacts investments including demand response opportunities?

This article aims at analyzing how a capacity obligation mechanism can address today´s concerns about security of electricity supply. The model is based on System Dynamics programming and simulates both new investments in electricity generation or demand-response and decommissioning decisions over several decades. The addition of a capacity mechanism under the form of capacity obligation is compared to the energy-only design with or without price cap. Two macro-economic scenarios are computed to study the effects of implementing a capacity obligation. The results underline that loss of load expectation is reduced with the addition of a capacity obligation compared to the energy-only case with a price cap. This is achieved through an increase in investments in peaking units including demand-response. Moreover, an efficiency ratio shows that a capacity obligation is more efficient to address capacity adequacy than the energy-only market with scarcity pricing.