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Generation Investment Evaluation Model in Electricity Market with Capacity Mechanisms

Nofri Yenita Dahlan(1*), Daniel S. Kirschen(2)

(1) Universiti Teknologi MARA, Shah Alam, Malaysia
(2) Faculty of Electrical Engineering, University of Washington, Seattle, United States
(*) Corresponding author



This paper proposes a new explicit approach for a generating company to evaluate investments in a liberalized electricity market with capacity mechanisms. The investment framework consists of two levels of investment problems. The upper problem consists of an optimization problem which models the expected future investments from all the companies in the market over the lifetime of the investment plant that the company is evaluating. A ‘prototype’ of future investments and a retirement schedule are defined using dynamic programming. The lower problem corresponds to the profit evaluation of the new investment plant for each year against the ‘prototype’ investment schedule obtained in the upper problem. The capacity mechanism is included both in the prototype future system expansion formulation as well as in the net revenue calculation of the new plant. Two types of capacity mechanisms have been modeled in the investment framework, i.e. capacity payment and capacity market. The model has been tested using a test system based on Great Britain’s Seven Years Statement. Three types of investment technologies have been evaluated, i.e. nuclear, coal and CCGT. Results show that in the capacity payment proportional to the LOLP, a higher VOLL on average increases the investments from all the companies in the prototype system expansion. On the other hand, a steeper demand curve for the ICAP market results in more investments in the prototype expansion schedule. Comparing the three investment alternatives, a nuclear power plant which has a longer lifetime is the most riskiest and the most affected by the uncertainty in capacity payment and capacity market followed by the coal and the CCGT plants.
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Generation Investment; Electricity Market; Capacity Payment; Capacity Market; Dynamic Programming

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