Energy only, capacity market and security of supply.A stochastic equilibrium analysis

Former generation capacity expansion models were formulated as optimization problems. Theseincluded a reliability criterion and hence guaranteed security of supply. The situation is differentin restructured markets where investments need to be incentivised by the margin resulting fromelectricity sales after accounting for fuel costs. The situation is further complicated by thepayments and charges on the carbon market. We formulate an equilibrium model of the electricitysector with both investments and operations. Electricity prices are set at the fuel cost of the lastoperating unit when there is no curtailment, and at some regulated price cap when there iscurtailment. There is a CO2 market and different policies for allocating allowances. Todayssituation is quite risky for investors. Fuel prices are more volatile than ever; the total amount ofCO2 allowances and the allocation method will only be known after investments has beendecided. The equilibrium model is thus one under uncertainty. Agents can be risk neutral or riskaverse. We model risk aversion through a CVaR of the net margin of the industry. The CVaRinduces a risk neutral probability according to which investors value their plants. The model isformulated as a complementarity problem (including the CVaR valuation of investment). Anillustration is provided on a small problem that captures the essence of today electricity world: achoice restricted to coal and gas, a peaky load curve because of wind penetration, uncertain fuelprices and an evolving carbon market (EU-ETS). We show that we might have problem ofsecurity of supply if we do not implement a capacity market....