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Electricity markets regarding the operational flexibility of power plants

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Abstract:

Electricity market mechanisms designed to steer sustainable generation of electricity play an important role for the energy transition intended to mitigate climate change. One of the major problems is to complement volatile renewable energy sources by operationally flexible capacity reserves. In this paper a proposal is given to determine prices on electricity markets taking into account the operational flexibility of power plants, such that the costs of long-term capacity reserves can be paid by short-term electricity spot markets. For this purpose, a measure of operational flexibility is introduced enabling to compute an inflexibility fee charging each individual power plant on a wholesale electricity spot market. The total sum of inflexibility fees accumulated on the spot markets then can be used to finance a capacity market keeping the necessary reserves to warrant grid reliability. Here each reserve power plant then gets a reliability payment depending on its operational flexibility. The proposal is applied to a small exemplary grid, illustrating its main idea and also revealing the caveat that too high fees paradoxically could create incentives to employ highly flexible power plants on the spot market rather than to run them as backup capacity.

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