Capacity Adequacy and Revenue Sufficiency in Electricity Markets With Wind Power

We present a computationally efficient mixed-integer program (MIP) that determines optimal generator expansion decisions, as well as periodic unit commitment and dispatch. The model is applied to analyze the impact of increasing wind power capacity on the optimal generation mix and the profitability of thermal generators. In a case study, we find that increasing wind penetration reduces energy prices while the prices for operating reserves increase. Moreover, scarcity pricing for operating reserves through reserve shortfall penalties significantly impacts the prices and profitability of thermal generators. Without scarcity pricing, no thermal units are profitable, however scarcity pricing can ensure profitability for peaking units at high wind penetration levels. Capacity payments can also ensure profitability, but the payments required for baseload units to break even increase with the amount of wind power. The results indicate that baseload units are most likely to experience revenue sufficiency problems when wind penetration increases and new baseload units are only developed when natural gas prices are high and wind penetration is low.