The Energy Transition and the Value of Capacity Remuneration Mechanisms

Capacity Remuneration Mechanisms (CRM) can be used in power markets to overtake marketfailures, reaching security of supply. However, investment in capacity is a dynamic process, thatdepends on the evolution of prices and costs overtime. In our paper we study the capacity remuneration value through a CRM depending on three possible different technologies thatparticipate to the market: a Variable Renewable Energy (VRE) source; a thermal efficient plant(i.e. Combine Cycle Gas Turbine) and a brown plant (i.e. coal). We shall see that these three typesof capacities can be framed by means of a common theoretical framework, whose level of complexity increases as the uncertainty rises, moving from the simplest scheme (VRE technology)to the most complex one (coal power plant). For these different technological provisions, weconsider how to evaluate them focusing on their investment value by adopting a stochastica pproach; we first provide a theoretical framework and then sensitivity analysis and calibration results. We show that for all three technology considered the effect of the CRM is to cap the firm revenues and as consequence it decreases their value