Current capacity markets fail to address extended periods of under-generation due to several key issues:
Limitations of Capacity Markets
- Mismatch with Modern Energy Resources
- Intermittency: Capacity markets were originally designed for traditional, baseload power sources. However, the increasing integration of intermittent renewables like solar and wind, which do not generate power continuously, complicates the capacity market model. These sources cannot always provide electricity when it is needed, making it challenging for capacity markets to ensure reliable generation across the grid.
- Public Policy Interventions
- Capacity markets are distorted by public policy interventions, such as state-level clean energy mandates and subsidies for renewables. These policies encourage the development of new renewable energy projects, often independent of market signals. This artificially suppresses capacity prices, making it harder for traditional generators to stay viable. While beneficial for achieving policy goals, it can undermine grid reliability as essential resources might be pushed toward retirement prematurely.
- Distortion from Storage and Flexibility Options
- The emergence of batteries and other flexible resources allows participants to circumvent traditional capacity market constraints. For instance, batteries can provide power during peak periods, reducing demand for traditional capacity resources. This can stabilize prices and create alternatives but also complicates the traditional capacity market’s assumption of always-available power sources.
- Inefficient Market Outcomes
- Capacity markets often retain excess capacity, leading to prices above competitive levels, which can be detrimental to consumers. Moreover, these markets sometimes exert market power and fail to address reliability concerns effectively. An efficient market should retain resources at a competitive price, but current capacity markets often fall short of this ideal.
Impact on Under-Generation
- Extended periods of under-generation can occur when capacity markets fail to incentivize and integrate resources effectively, especially during times of peak demand or when renewable output is low.
- The reliance on intermittent sources and the inability of capacity markets to manage these variations can exacerbate under-generation risks.
- As batteries and other flexible resources become more prevalent, traditional capacity models are challenged to adapt and provide stable, reliable electricity supply across the grid.
In summary, capacity markets struggle with modern energy resources, policy interventions, and emerging flexibility options, all of which contribute to their inability to effectively mitigate extended periods of under-generation.
Original article by NenPower, If reposted, please credit the source: https://nenpower.com/blog/how-do-current-capacity-markets-fail-to-address-extended-periods-of-under-generation/
