Capacity mechanism analysis based on dynamic simulation of generation investment

Generation capacity investment holds the origin of the electric power supply chain, and creates significant impacts on the reliability of power supply service. Based on the system dynamics theory, this paper builds up a model that describes the development of electric power generation investment, and uses the model to perform the dynamic simulation of generation capacity investment in different market scenarios, such as the energy-only market and the capacity payment mechanism. Particularly, imperfections of the real world are taken into consideration, which is reflected by the accuracy of load forecast. The simulation shows that generation investment would fluctuate due to the volatility of price and imperfection of information, even if the average revenue recovers the investment cost of the optimal installation, and thus result in shortage of supply in the market. Furthermore, suitable capacity mechanisms help reduce the possibility of shortage, but may trigger overinvestment in generation capacity and remain the fluctuation that threatens the reliability of power supply service.