Model-based analysis of the impact of capacity markets on electricity markets

In this paper, we discuss the general necessity of capacity markets. Furthermore, we implement a basic capacity payment mechanism similar to the Spanish one in the existing agent-based electricity market model PowerACE to analyze the impact of such a capacity payment mechanism on the long-term development of investments in conventional capacities and on electricity prices. Considering different scenarios for future energy carrier and CO₂ prices, we find that investments are carried out earlier in a system with capacity payments. Also, more capacities are built in the presence of a capacity market. The damping effect on electricity prices is visible but dependent on the development of energy carrier prices and on the characteristics of the payment mechanism.