Promoting renewable energy through capacity markets: An analysis of the Russian support scheme

Most existing support schemes aim to stimulate the deployment of renewable energy sources in the electricity sector on the basis of the electricity output (MWh) of renewable energy installations. Support is anchored in the electricity commodity market. In contrast to this established approach, Russia intends to promote renewable energy through the capacity market. The idea is to remunerate investors for the installed capacity (MW) of their installations, in particular for the availability of their installations to produce electricity. This article argues that, contrary to the implicit consensus, a capacity-based approach to supporting renewable energy can provide an alternative to the current output-based schemes. Capacity-based schemes limit the incentive that the operators of renewable energy installations currently have under output-based schemes to deliver electricity to the grid even in periods of low demand. These schemes also provide investors with a more predictable income flow. However, to be successful, the regulation of capacity supply – currently designed for flexible power plants – needs to accommodate the specific production patterns of variable renewable energy installations. This paper examines ways to overcome this challenge in Russia and provides more general conclusions on the complex interaction between capacity markets and renewable energy investments.