Can an energy only market enable resource adequacy in a decarbonized power system?

Abstract

Future power systems, in which generation will come almost entirely from variable Renewable Energy Sources (vRES), will be characterized by weather-driven supply and flexible demand. In a simulation of the future Dutch power system, we analyze whether there are sufficient incentives for market-driven investors to provide a sufficient level of security of supply, considering the profit-seeking and myopic behavior of investors. We co-simulate two agent-based models (ABM), one for generation expansion and one for the operational time scale. The results suggest that in a system with a high share of vRES and flexibility, prices will be set predominantly by the demand’s willingness to pay, particularly by the opportunity cost of flexible hydrogen electrolyzers. The demand for electric heating could double the price of electricity in winter, compared to summer, and in years with low vRES could cause shortages. Simulations with stochastic weather profiles increase the year-to-year variability of cost recovery by more than threefold and the year-to-year price variability by more than tenfold compared to a scenario with no weather uncertainty. Dispatchable technologies have the most volatile annual returns due to high scarcity rents during years of low vRES production and diminished returns during years with high vRES production. We conclude that in a highly renewable EOM, investors would not have sufficient incentives to ensure the reliability of the system. If they invested in such a way to ensure that demand could be met in a year with the lowest vRES yield, they would not recover their fixed costs in the majority of years.