Obtaining best value for money in RES auctions: a capacity-based with an embedded menu of contracts approach

Abstract

As the impact of RES on energy markets has become more noticeable, the appropriate design of support schemes has gained in importance. Capacity-based support schemes are known to avoid market distortions. However, these schemes present two relevant limitations: (i) they may lead to the installation of RES capacity whose energy output value can be low, and (ii) defining the quantity to be supported is challenging, for RES targets are usually expressed as a minimum RES energy production. This paper proposes a capacity-based RES support scheme aimed at overcoming the previous limitations, therefore: (i) minimizing market distortions, (ii) maximizing the value of green energy outputs and (iii) allowing the regulator to meet green energy targets. The key feature is a bonus payment that depends on the operational profits earned by RES generators. This bonus payment is defined through a menu of contracts. The incentive properties are illustrated with a case study.